Machine Learning for Fraud Detection
Artificial Intelligence Machine Learning

How to Use Machine Learning for Fraud Detection

Fraud! The act that is causing companies and individuals trillions of dollars in cyberspace! Lately, PWC has released a Global Economic Crime and Fraud Survey 2022 in which it has been said that 46% of companies have gone through fraud, corruption, and other economic crimes.

So where are they mostly coming from? In that same report by PWC, it has been clearly mentioned that the learning curve of new technologies in companies is utilized by criminals. One of the main vulnerabilities used by cybercriminals. 

They are aware that there will be a lot of mistakes and loose ends at this time. That’s just the organizational aspect of it. 

As the volume of e-commerce, online banking, and online insurance increases, fraudsters take advantage of any security vulnerability they can find in any system. 

Before experts can repair a system, sensitive data is frequently stolen, and millions of dollars are lost.

This is a situation where fraud detection is imminent. 

Using machine learning now the system can make use of the above-mentioned data in real time and judge whether an activity is fraudulent or non-fraudulent. 

What is machine Learning?

As the name suggests, a Machine learning system can process data of any volume and predict based on human requirements. 

Not only that, Machine learning exhibits behavior akin to a child’s development. As a child gets older, she gains more experience carrying out tasks, which raises her performance measure.

One of the applications of ML is with Software programs. The software programs are useful to predict outcomes of various scenarios more accurately. Historical data that’s been there with the company is useful for ML programs after filtering to predict various outcomes. 

machine learning process

What is machine learning for fraud detection?

For instance, at earlier times, a change in the data such as transaction details, transaction time, transaction history, GPS location, etc. would have created a red flag in the bank when he or she was purchasing something from a faraway location. 

This can cause a plethora of problems. Not just from a technical but also from a business aspect as well. 

But how can a computer system be able to detect fraud before it has happened? That’s the space where machine learning kicks in. 

Machine learning for fraud detection consists of a group of artificial intelligence (AI) algorithms trained using your historical data to suggest risk rules. 

For instance, if the account holder is from London and he is doing a transaction in Romania it can be a potential fraud going to happen.

The algorithm is fed with varieties and then so that it can correlate in between and detect fraud. This rule engine is the brain of an ML program. 

The rules allow or restrict particular user actions, such as dubious logins, identity theft, or fraudulent transactions.

By examining consumers’ recent patterns and transaction methods, machine learning for fraud detection operates. 

It can analyze these behaviors more quickly and effectively than any human analysis, and as a result, it can spot any deviations from typical behavior right away. 

This enables the user to approve opportunities in real-time prior to a transaction being completed.

ML programs transform complex and confusing data by consistently adding new data and experience, and a user trains the ML system further.

Machine learning is useful for the detection of fraudulent activities such as:

  • Ad Fraud
  • Bot Attacks
  • Fake Accounts
  • Referral Abuse
  • Identity Fraud
  • Account Takeover
  • Account Sharing
  • Subscription Abuse
  • Promo Abuse
  • Payment Fraud
  • Fraudulent Transfer
  • Money Laundering, etc.

Advantages of using ML (machine learning) in fraud detection


Successful machine learning programs incorporate ongoing experimentation with ease. Just creating a machine learning model and letting it run its calculations is insufficient. Technology is evolving quickly, and fraudsters are cunning. 

For an effective fraud analytics program, having a sandbox where data scientists can experiment freely with a range of methods, data, and techniques to combat fraud has become essential. 

An almost immediate return can be expected from investments made to increase the capacity of data scientists who fight fraud.

Credit card fraud detection

Theft of credit cards and payment fraud are two additional ways that fraudsters use stolen data to complete transactions that typically don’t require a physical card, like online purchases. 

These situations can be avoided by using machine learning models to analyze past customer behavior, including purchase amounts, locations, and types, and flag any transactions that seem out of the ordinary.

Models for machine learning are capable of identifying fraud and atypical credit card transactions. 

Determining the authenticity of credit card transactions using algorithms like support vector machines (SVMs), random forests, logistic regression, deep neural networks along with long short-term memory (LSTM) networks, autoencoders, and convolutional neural networks (CNNs). 

The system can identify transactions that differ significantly from those made with regular credit cards using outlier detection techniques.

Improved processes

Business-level decisions present another difficulty. Some machine learning models require the classification of historical cases as fraudulent or non-fraudulent for the model to forecast future data.

In order to create these labels, either sets of clearly defined business rules or verified consumer feedback regarding whether the transaction was fraudulent are necessary. 

Choosing how to implement the predictions in practical situations must be done after a machine learning model has been trained and is ready for deployment. 

Talking with subject matter experts and business leaders to create a clear path for operations can usually help to overcome these difficulties.

Lightning fast!

It’s crucial to have quicker solutions like machine learning, to identify fraud as the pace of industries like commerce is picking up at an unimaginable speed. Evaluation of massive amounts of data is quickly possible by machine learning algorithms.

Machine learning works with the help of an automated anomaly detection system to identify typical time series metrics (essentially, KPIs measured over time, such as the number of users, sessions, checkouts, revenues, and requests).

A good way to remove false positives

A security system commits a “False Positive” (FP) error when it interprets a non-malicious activity as an attack. These mistakes are currently a major problem for cybersecurity.

First, algorithms for ML-based anomaly detection can recognize abnormal behavior across a variety of data patterns. Furthermore, by applying contextual filters to those anomalies, you can make sure that you only receive alerts on problems that are actually important to you.

Behavior analytics

The usage of ML for fraud detection is at a granular level with the help of a behavior analytics program. Compiling each user’s data and creating behavioral patterns will help detect anomalies easily. 

One of the biggest perks of creating such profiles is that even other requests that can lead to money loss such as password change can be easily detected and prevented. 

Final note…

Machine learning techniques used in fraud detection are unquestionably more trustworthy than transaction rules and human review. The machine learning solutions process a sizable number of transactions in real-time and are dynamic and scalable.

However, human intervention is essential for effective machine learning incorporation in any business. The training set will aid the model’s comprehension of the specified algorithm. You will receive the precise model needed for fraud detection once the machine has finished its training.

Perfomatix | Product Engineering Services Company