It means finding and stopping fraud
Fraud Detection Using before or after it happens. For example, if
someone tries to buy something using a
Machine Learning stolen credit card, the system should detect
it as fraud and block the transaction.
Name: Gauri More and Shrawani Rakh
Swaranjali Veer and Shivani Pawar
Branch: Artificial Intelligence and
Machine Learning
College: CSMSS College Of Polytechnic
Abstract "Fraud is a huge global issue. Billions
of dollars are lost every year, and new types
"Financial fraud continues to be a of fraud are always appearing. They also
major challenge, costing industries billions often create false alarms, stopping good
annually. Traditional fraud detection customers from making purchases and
systems, which rely on predefined rules, causing a lot of frustration. Then, we'll
are often inefficient and struggle to identify introduce machine learning as the new
sophisticated new fraud schemes. This solution. Think of it as giving the fraud
paper explores the application of machine detection system a brain. In our digital
learning as a superior alternative. We will world, criminals are constantly trying to
detail a complete machine learning trick people and companies to steal money.
pipeline, including data preprocessing to The old ways of stopping them, like using
handle imbalanced datasets, feature simple rules, aren't good enough anymore
engineering. because the criminals keep changing their
The presentation will discuss key methods.
evaluation metrics, such as precision and
recall, demonstrating the ability of machine
learning to significantly enhance fraud
detection accuracy and reduce false
positives, thereby offering a more scalable
and adaptive solution to this critical
problem."
Introduction
Fraud is any kind of dishonest or
We will show you how this
illegal activity, usually done to steal money.
technology works, from teaching the
program with old data to having it stop History
fraud in real-time. This is about building a
The Rule-Based Era (Before 1990s) Manual
smarter, more effective way to protect
checks and fixed rules. Flagged transactions
against financial crime.
based on simple criteria like size or
Machine learning is the modern location. Couldn’t adapt to new fraud
solution to this problem. we use a smart tactics.
computer program that learns what fraud
The Data Mining Era (1990s) Statistical
looks like. We give it millions of past
methods and early classification models.
payments and tell it which ones were real
Computers analysed data to find hidden
and which were fraudulent. The program
patterns, a step beyond fixed rules.
then studies this data and finds hidden,
complex patterns that a human could never The Machine Learning Era (2000s)
see. Mainstream use of ML algorithms (e.g.,
Random Forests). Models automatically
Machine learning has emerged as a
learned from data to identify fraudulent
powerful and adaptive solution to these
activity.
challenges. Instead of static rules, ML
models are trained on vast historical data to The Big Data & Real-Time Era (2010s) High-
automatically learn the suitable and performance ensemble models (like
complex patterns that distinguish XGBoost) and advanced computing.
fraudulent transactions from legitimate Models processed transactions in
ones. milliseconds for instant decisions at a
massive scale.
The AI & Deep Learning Era (2015 - Present)
Deep learning, graph-based ML, and
Explainable AI (XAI). Models now find
complex fraud networks and can explain
their reasoning.
Identify anomalies: Spot transactions that
don't fit a user's normal behavior.
Work in real-time: Process millions of
transactions in milliseconds.
Reduce false alarms: Use sophisticated
analysis to better distinguish between
unusual but legitimate behavior and actual
fraud.
Literature often within milliseconds. This requires
efficient model deployment and
A Machine Learning Pipeline is a
optimization to handle large volumes of
systematic workflow designed to automate
data in real-time. Balancing accuracy with
the process of building, training, and
speed is crucial, as too many false positives
deploying of ML models. It includes several
can disrupt legitimate transactions while
steps, such as data collection,
too few can lead to missed fraud.
preprocessing, feature engineering, model
training, evaluation and deployment. Evaluation Metrices
Machine learning algorithms employed For fraud detection models,
in fraud detection leverage various Precision, Recall, and F1-Score are crucial
approaches to identify anomalous patterns metrics to evaluate performance,
indicative of fraudulent activity. Key especially on imbalanced datasets where
algorithms commonly utilized include: fraud is rare. Precision measures the
accuracy of positive fraud predictions,
❖ Some Challenges
minimizing false positives that flag
Two major challenges in fraud detection legitimate transactions as fraudulent.
using machine learning are imbalanced Recall (Sensitivity) identifies all actual
data (meaning there are significantly fewer fraudulent transactions, minimizing false
fraudulent transactions than legitimate negatives where fraud goes undetected.
ones) and the need for real-time The F1-Score provides a balanced, single
processing, where models must quickly metric by taking the harmonic mean of
identify potential fraud as transactions precision and recall, giving a more
occur, making it difficult to train effectively comprehensive view of the model's ability
on rare fraudulent events. to correctly identify fraud without
excessive false alarms.
I. Imbalanced data:
❖ Algorithms
Machine learning models often struggle
to accurately detect the minority class
(fraudulent transactions) when it's I. Random Forest:
significantly outnumbered by the majority This is an ensemble learning method
class (legitimate transactions). This can that constructs a multitude of decision
lead to the model overfitting to the trees during training and outputs the mode
majority class and poorly identifying of the classes (for classification) or mean
fraudulent transactions. Various prediction (for regression) of the individual
techniques like oversampling, trees. In fraud detection, it can effectively
undersampling, and cost-sensitive learning handle high-dimensional data and identify
are used to address this imbalance. complex relationships between features,
II. Real-time processing: making it robust to noise and outliers.
Fraud detection systems need to react
quickly to potential fraudulent activity,
Methodology
A machine learning pipeline is a step-
by-step process that automates data
preparation, model training and
deployment.
I. Data Collection and Preprocessing:
Gather data from sources like
II. XGBoost (ExtremGradient-Boosting): databases, APIs or CSV files. Clean
the data by handling missing values,
An optimized distributed gradient duplicates and errors. Normalize and
boosting library designed to be highly standardize numerical values.
efficient, flexible, and portable. It's an Convert categorical variables into a
ensemble method that builds trees machine readable format.
sequentially, XGBoost is known for its II. Feature Engineering: Select the most
speed and performance in various machine important features for better model
learning tasks, including fraud detection, performance. Create new features
due to its ability to handle large datasets for feature extraction or
and its regularization techniques that transformation.
prevent overfitting. III. Data splitting: Divide the dataset into
Extream training, validation and testing sets.
Gradient
Boosting When dealing with imbalanced
datasets, use random sampling.
Effeciency
High IV. Model Selection & Training: Choose
and XGBoost Accuracy
Flexibility the best algorithm based on the
problem includes classification,
Productive regression, Clustering etc. Train the
Power
model using the training dataset.
V. Model evaluation & Optimization:
III. Isolation Forest:
Test the model's performance using
This is an unsupervised anomaly accuracy, precision, recall and other
detection algorithm particularly well-suited metrics. Tune hyperparameters
for identifying outliers or anomalies, which using Grid Search or Random Search
is crucial in fraud detection where and avoiding overfitting using
fraudulent transactions are often rare and techniques like cross- validation.
distinct from normal transactions. It works VI. Model Deployment: Deploy the
by randomly selecting a feature and then trained model using Flask, Fast API,
randomly selecting a split value between TensorFlow and cloud services. Save
the maximum and minimum values of the the trained model for real-world
selected feature. applications.
VII. Monitoring and Updating: Fraud • Reduced manual review time:
patterns evolve as fraudsters Similarly, the amount of time spent
develop new methods. Continuously on manually reviewing information
monitor the model’s accuracy and can be reduced when you let
performance in production. machines analyse all the data points
Periodically retrain the model with for you.
new data to adapt to changing fraud • Better predictions with large
behaviour. Use feedback loops to datasets: The more data you feed a
incorporate confirmed fraud cases machine learning engine, the more
for model improvement. trained it becomes. That is to say,
while large datasets can sometimes
make it challenging for humans to
Data collection find patterns, it’s actually the
opposite with an AI-driven system.
• Cost-effective solution: Unlike hiring
more RiskOps agents, you only need
one machine-learning system to go
Data Pre-Processing And
through all the data you throw at it,
Cleaning
regardless of the volume. A machine
learning system is a great ally to scale
up your company without increasing
risk management costs drastically at
Analysing The Data
the same time.
Feature Engineering
Training The Machine
Model
Testing And Predictions
Result and Discussion
• Faster and more efficient detection:
Let’s say you’re using net banking or
The system gets to quickly identify
a payment app (like PayPal or Google Pay).
suspicious patterns and behaviours.
If you suddenly try to transfer a large
amount of money to a new account, the Detect fraud faster by analyzing
bank’s fraud detection system quickly massive data in real-time. Be more accurate
checks if your behaviour matches past by reducing both missed fraud and false
fraud cases. alarms. Scale effortlessly to protect an ever-
growing number of digital transactions.
The future of fraud detection will rely
on even more sophisticated, hybrid models
that blend the best of different AI
techniques to stay one step ahead of
criminals. By embracing these
technologies, we can build a proactive and
intelligent defence, ensuring a safer and
more secure digital world for everyone.
If it looks suspicious: The system might;
o Block the transaction,
o Send you an alert, References
o ask you to verify the transfer (like Website -Medium
OTP, a phone call, or security
questions). https://medium.com
This helps stop hackers from stealing Website -towards-data-science
your money even if it sometimes means https://towardsdatascience.com
your genuine transfer gets double-checked
or briefly delayed. IEEE Xplore, or Research Gate
Machine learning lets banks and Google Scholer
payment apps spot fraud quickly by Research Articles – SMOTE Paper
learning from past cases, helping protect
your money, though sometimes it may
wrongly suspect honest transfers as well.
Conclusion
Machine learning has revolutionized
the field of fraud detection by offering
faster, more accurate, and scalable
solutions compared to traditional methods.
Its ability to learn from large volumes of
data allows it to identify complex and
evolving patterns of fraudulent behaviour,
ensuring better classification and
prediction.
