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Fraud Detection

The financial services industry and the industries that involve financial transactions are suffering from fraud-related losses and damages. 2016 was a banner year for financial scammers. In the US alone, the number of customers who experienced fraud hit a record 15.4 million people, which is 16 percent higher than 2015. Fraudsters stole about $6 billion from banks last year. A shift to the digital space opens new channels for financial services distribution. It also created a rich environment for fraudsters.

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Machine learning vs. rule-based systems in fraud detection

The machine learning (ML) approach to fraud detection has received a lot of publicity in recent years and shifted industry interest from rule-based fraud detection systems to ML-based solutions. What are the differences between machine learning and rule-based approaches?

The rule-based approach. Fraudulent activities in finance can be detected by looking at on-surface and evident signals. Unusually, large transactions or the ones that happen in atypical locations obviously deserve additional verification. Purely rule-based systems entail using algorithms that perform several fraud detection scenarios, manually written by fraud analysts. Today, legacy systems apply about 300 different rules on average to approve a transaction. That’s why rule-based systems remain too straightforward. They require adding/adjusting scenarios manually and can hardly detect implicit correlations. On top of that, rule-based systems often use legacy software that can hardly process the real-time data streams that are critical for the digital space.

ML-based fraud detection. However, there are also subtle and hidden events in user behavior that may not be evident, but still signal possible fraud. Machine learning allows for creating algorithms that process large datasets with many variables and help find these hidden correlations between user behavior and the likelihood of fraudulent actions. Another strength of machine learning systems compared to rule-based ones is faster data processing and less manual work. For example, smart algorithms fit well with behavior analytics for helping reduce the number of verification steps.