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Paper-7_Supervised Machine Learning Model for Credit Card Fraud Detection

Paper-7_Supervised Machine Learning Model for Credit Card Fraud Detection

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Published by Rachel Wheeler
Electronic transactions with credit card become more popular mode of payment nowadays such as online shopping and banking. Credit card frauds increased with the introduction of latest transaction technologies. To detect credit card frauds in electronic transactions becomes the focus of risk control of banks. Several researchers have proposed their work for credit card fraud detection. We proposed a binary classification model for credit card fraud detection. This Binary Classification model gives the accuracy up to 97% and also reduces the false alarm rate.
Electronic transactions with credit card become more popular mode of payment nowadays such as online shopping and banking. Credit card frauds increased with the introduction of latest transaction technologies. To detect credit card frauds in electronic transactions becomes the focus of risk control of banks. Several researchers have proposed their work for credit card fraud detection. We proposed a binary classification model for credit card fraud detection. This Binary Classification model gives the accuracy up to 97% and also reduces the false alarm rate.

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Published by: Rachel Wheeler on Aug 31, 2011
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01/24/2013

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International Journal of Computational Intelligence and Information Security, August 2011 Vol. 2, No. 8
 
55
Supervised Machine Learning Model for Credit Card Fraud Detection
Manoj Aryal, Prof. Anurag jain and Dr. A.K. Sachan
Deptt. Of Computer science & Engineering, Radharaman Institute of Technology & science,Bhopal-462051, Indiamanoj_aryal_32@yahoo.co.in
Abstract
Electronic transactions with credit card become more popular mode of payment nowadays such as onlineshopping and banking. Credit card frauds increased with the introduction of latest transaction technologies. Todetect credit card frauds in electronic transactions becomes the focus of risk control of banks. Several researchershave proposed their work for credit card fraud detection. We proposed a binary classification model for creditcard fraud detection. This Binary Classification
 
model gives the accuracy up to 97% and also reduces the falsealarm rate..
Keywords:
Fraud detection, RBF, Credit card, True Positive
1. Introduction
Credit card fraud is a wide-ranging term for theft and fraud committed using a credit card or any similar paymentmechanism as a fraudulent source of funds in a transaction. The purpose may be to obtain goods without paying,or to obtain unauthorized funds from an account [1]. Credit card fraud detection has drawn a lot of researchinterest and a number of techniques, with special emphasis on data mining and neural networks, have beensuggested. Ghosh and Reilly [2] have proposed credit card fraud detection with a neural network. They havebuilt a detection system, which is trained on a large sample of labeled credit card account transactions. Thesetransactions contain example fraud cases due to lost cards, stolen cards, application fraud, counterfeit fraud,mail-order fraud, and non received issue (NRI) fraud.
1.1 Types of Credit Card Fraud [3]
Credit fraud can fall into one of five categories:a.
 
Counterfeit credit cardb.
 
Lost or Stolen Cardsc.
 
No-Card Fraudd.
 
Non-Receipt Fraud
 
 
International Journal of Computational Intelligence and Information Security, August 2011 Vol. 2, No. 8
 
56e.
 
Identity Theft Frauda.
 
Counterfeit credit card:-
Makes up for 37% of all funds lost through credit card frauds. To makefake cards criminals use the newest technology to “skim” information contained on magneticstripes of cards and to pass security features such as holograms.b.
 
Lost or Stolen Cards:-
Cards stolen from their cardholders or lost by them account for 23% of allcard frauds. Often, cards are stolen from the workplace, gym, and unattended vehicles.c.
 
No-Card Fraud:-
Comprise 10% of all the losses and is completed without the physical card inhand. This can happen by giving your credit card information on the phone to shady telemarketersand deceptive Internet sites that are promoting the sales of their non-existent goods and services.d.
 
Non-Receipt Fraud:-
Non-Receipt Fraud is responsible for 7% of all losses. It occurs when newor replaced cards mailed by your card company are stolen during the process of being mailed.However, this type of fraud is on the decline with the card-activation process that most companiesuse.
e.
 
Identity Theft Fraud:-
Accounts for 4% of all losses, and occurs when criminals apply for a cardusing someone else’ identity and information.
 
2. RELATED WORK
All Recently, Syeda et al [4] have used parallel granular neural networks (PGNNs) for improving the speed of data mining and knowledge discovery process in credit card fraud detection. A complete system has beenimplemented for this purpose. Stolfo et al. [5] suggest a credit card fraud detection system (FDS) using Metalearning techniques to learn models of fraudulent credit card transactions. Meta learning is a general strategy thatprovides a means for combining and integrating a number of separately built classifiers or models. A Metaclassifier is thus trained on the correlation of the predictions of the base classifiers. Aleskerov et al. [6] presentCARDWATCH, a database mining system used for credit card fraud detection. The system, based on a neurallearning module, provides an interface to a variety of commercial databases. Kim and Kim have identified
 
 
International Journal of Computational Intelligence and Information Security, August 2011 Vol. 2, No. 8
 
57skewed distribution of data and mix of legitimate and fraudulent transactions as the two main reasons for thecomplexity of credit card fraud detection. [7] Based on this observation, they use fraud density of real transactiondata as a confidence value and generate the weighted fraud score to reduce the number of misdetections. Brauseet al [8] have developed an approach that involves advanced data mining techniques and neural network algorithms to obtain high fraud coverage. Chiu and Tsai [9] have proposed Web services and data miningtechniques to establish a collaborative scheme for fraud detection in the banking industry. With this scheme,participating banks share knowledge about the fraud patterns in a heterogeneous and distributed environment. Toestablish a smooth channel of data exchange, Web services techniques such as XML, SOAP, and WSDL areused. Phua et al. [10] have done an extensive survey of existing data-mining-based FDSs and published acomprehensive report. Prodromidis and Stolfo[11] use an agent-based approach with distributed learning fordetecting frauds in credit card transactions. It is based on artificial intelligence and combines inductive learningalgorithms and Meta learning methods for achieving higher accuracy. Phua et al.suggest[12] the use of metaclassifier similar to in fraud detection problems. They consider native Bayesian, C4.5, and Back Propagationneural networks as the base classifiers. A Meta classifier is used to determine which classifier should beconsidered based on skewness of data. The problem with most of the above mentioned approaches is that theyrequire labeled data for both genuine, as well as fraudulent transactions, to train the classifiers. Getting real-world fraud data is one of the biggest problems associated with credit card fraud detection. Also, theseapproaches cannot detect new kinds of frauds for which labeled data is not available. In contrast, we present asupervised machine learning technique for credit card FDS
.
3. SVM (Support Vector Machine)
SVMs were developed by Cortes & Vapnik [13] for binary classification. Basically, we are looking for theoptimal separating hyper plane between the two classes by maximizing the margin between the classes' closestpoints (see figure below) the points lying on the boundaries are called support vectors, and the middle of themargin is our optimal separating hyper plane; Data points on the wrong side of the discriminant margin areweighted down to reduce their influence (soft margin). When we cannot find a linear separator, data points areprojected into an (usually) higher-dimensional space where the data points effectively become linearly separable

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