Industry classification is the act of categorizing a business by industry, and in some cases, by sub-industry.
Understanding a business’s industry clarifies how a business makes money. Industry is essential intel for marketing, sales, credit risk evaluation, underwriting, customer onboarding, and risk monitoring. Industry classifications are typically captured in an industry classification code: a label or definition of a business’s industry using a word- or digit-based categorization system. There are three common approaches to industry classification:
NAICS — The North American Industry Classification System — is one of the leading industry classification systems. This detailed 2-to-6-digit industry classification code provides a good starting point for industry classification data, but lacks granularity. For example, the NAICS code for “Administrative and Support and Waste Management and Remediation Services” includes both septic tank cleaning and temp agencies. The NAICS code can increase risk exposure if you don’t have a complete understanding of the business.
GICS, or Global Industry Classification Standard, is an 8-digit industry classification system that organizes companies into sectors, then into industry group, industry, and sub-industry. It’s used by financial institutions and systems around the world. The first two digits refer to a sector; the next two industry group; the following two refer to industry; the next two sub-industry. Together, the full 8-digit code describes sector, industry groups, industry, and sub-industry. The GICS code is typically accurate, but it sometimes fails to capture the broader picture.
The Standard Industrial Classification is an older 4-digit code developed by the U.S. government that’s largely been replaced by NAICS. That said, some major agencies — from the U.S. Census Bureau to the U.S. Securities and Exchange Commission — continue to use SIC codes. Due to its age, the SIC code struggles to reflect today’s economy.
Industry classification is critical - and challenging, particularly when it comes to small and medium businesses (SMBs).
For one, industry classification data often fails to reflect rapidly transforming industries and business models. The economy is evolving, and traditional industry classifications can’t capture those changes. In addition, SMBs are remarkably heterogeneous. Detailed industry classification data can help financial institutions develop realistic benchmarks and risk evaluations. Finally, accurate industry data empowers financial service providers to reach more qualified prospects - and better serve customers.
Fresh, granular, accurate industry data unlocks a wealth of insight about businesses that financial institutions and fintechs can use to navigate disruption and fuel growth.