International Journal of Electrical and Data Communication 2024; 5(1): 07-11

E-ISSN: 2708-3977
P-ISSN: 2708-3969
IJEDC 2024; 5(1): 07-11
Fraud detection using deep learning
© 2024 IJEDC
www.datacomjournal.com Sarthak Rout and Khyati Jaiswal
Received: 07-11-2023
Accepted: 13-12-2023
DOI: https://doi.org/10.22271/27083969.2024.v5.i1a.37
Sarthak Rout
B.E. CSE AIML, Chandigarh Abstract
University, Mohali, Punjab, Fraud detection is a critical aspect of various industries, such as finance, e-commerce, and insurance, to
India safeguard against fraudulent activities. Machine learning (ML) techniques have emerged as powerful
tools for fraud detection, enabling the identification of patterns and anomalies that indicate fraudulent
Khyati Jaiswal behavior. This paper explores two distinct approaches to fraud detection using ML: classical machine
B.E. CSE AIML, Chandigarh learning and neural networks. The classical machine learning approach utilizes K-means clustering to
University, Mohali, Punjab,
group similar transactions and three types of logistic regression models to predict the probability of a
India
transaction being fraudulent. The neural network approach employs a simple neural network, Gaussian
noise addition, and oversampling, scaling, and PCA to enhance model performance. A general outline
for fraud detection model building is proposed, encompassing data preprocessing, feature engineering,
data splitting, model selection, model training, model evaluation, imbalanced data handling, ensemble
methods, threshold optimization, monitoring and updating, explain ability and interpretability, and
compliance and security.

Keywords: Fraud Detection, machine learning, neural networks, logistic regression, K-means
clustering, PCA

Introduction
This is the start of the body text of your paper. In today's increasingly digital world, fraud
has become a pervasive issue, causing significant financial losses and reputational damage to
businesses and organizations across various industries. [1] The ability to effectively detect and
prevent fraud is crucial for maintaining the integrity and security of financial transactions, e-
commerce platforms, and insurance systems. Traditional fraud detection methods, often
relying on rule-based systems and manual reviews, have limitations in adapting to evolving
fraud patterns and handling large volumes of complex data. In recent years, deep learning, a
subset of artificial intelligence (AI), has emerged as a powerful tool for fraud detection due
to its ability to learn intricate patterns and identify anomalies from vast amounts of data. [2]
Deep learning algorithms, particularly neural networks, have demonstrated superior
performance in various fraud detection tasks. These algorithms can extract meaningful
features from complex data, including transaction details, customer profiles, and historical
behavior patterns, to identify patterns that are indicative of fraudulent activities.
Additionally, deep learning models can continuously adapt to new fraud patterns and
emerging threats, providing a proactive approach to fraud prevention. [3]

The application of deep learning in fraud detection has gained significant traction in
various industries, including
Financial Institutions: Fraudulent transactions in the financial sector, such as credit card
fraud and insurance fraud, can lead to substantial financial losses. Deep learning models are
being employed to analyze vast amounts of transaction data to identify anomalies and
patterns associated with fraudulent activities. E-commerce Platforms: E-commerce platforms
are susceptible to various types of fraud, including account takeovers, fake reviews, and
fraudulent purchases [4]. Deep learning models are being used to analyze customer behavior,
transaction patterns, and device information to identify suspicious activities and prevent
fraudulent transactions. [5]
Corresponding Author:
Sarthak Rout Insurance Companies: Insurance fraud, such as false claims and exaggerated losses, poses a
B.E. CSE AIML, Chandigarh significant challenge to insurance companies. Deep learning models are being applied to
University, Mohali, Punjab, analyze claims data, medical records, and customer behavior to detect fraudulent patterns
India and prevent financial losses [6]

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The adoption of deep learning for fraud detection has  Scalability for Large Data Volumes: Deep learning
brought several transformative benefits: models can effectively handle large volumes of
 Enhanced Fraud Detection Accuracy: Deep learning complex data, making them suitable for fraud detection
models can extract hidden patterns and anomalies from in large-scale operations. [9]
complex data, leading to improved accuracy in  Reduced Reliance on Manual Reviews: Deep learning
identifying fraudulent activities compared to traditional models can automate fraud detection tasks, reducing the
methods. [7] need for manual reviews and improving operational
 Adaptability to Evolving Fraud Patterns: Deep learning efficiency. [10]
models can continuously learn and adapt to new fraud
patterns, ensuring that fraud detection systems remain Related Work
effective against emerging threats. [8]

Table 1: Literature survey

Paper Title Year Author(s) Key Findings
A novel deep learning-based R. A. Al-Qaheri
Proposed a novel deep learning-based fraud detection model for
fraud detection model for 2021 and H. El-
imbalanced financial datasets.
imbalanced financial datasets Khozondar
A survey on deep learning for A. Ahmed, M.
Provided a comprehensive survey of deep learning applications in
cyber security: Applications, 2020 Marjani, and M.
cybersecurity, including fraud detection.
challenges and future directions Imran
Deep learning for fraud detection Discussed the use of deep learning for fraud detection in retail
2018 A. Khodayari
in retail transactions transactions.
Fraud detection in e-commerce S. Dua and M. Provided a comprehensive review of fraud detection in e-commerce
2018
using deep learning: A review Islam using deep learning.
Proposed a deep learning approach to network intrusion detection. The
A deep learning approach to I. Shen and J.-H. proposed approach is based on a convolutional neural network (CNN)
2019
network intrusion detection Chou that is able to extract features from network traffic data and classify it
as normal or intrusive.

Proposed System identifies anomalies, adapts to evolving fraud patterns, and

The proposed system utilizes deep learning to effectively provides real-time protection. [15]
identify fraudulent activities. It collects and preprocesses
data, trains and evaluates a deep learning model, and Methodology
deploys the model for real-time fraud detection. We thought of two different approached when working with
 Data Collection and Preprocessing- A comprehensive our model of fraud detection. The first one involved a very
dataset of transactions, customer information, and classic machine learning approach that implemented the K-
historical fraud cases is collected. Data cleaning and means algorithm along with three different types of logistic
preprocessing are performed to ensure quality and regressions, namely, vanilla logistic regression, logistic
consistency. Feature engineering techniques extract regression with SMOTE over sampling and finally the
meaningful features. [11, 22] logistic regression with balanced class weights. This is
 Model Training and Evaluation- An appropriate deep further explained in detail. [16, 21]
learning algorithm is selected based on the data The other approach implemented the usage of Neural
characteristics. The model is trained on the Networks, something we’re actually after. This is important
preprocessed data to minimize classification errors. Its in terms of emerging technologies and moreover to consider
performance is evaluated using a validation dataset. [12] better optimized models that are capable of handling real
 Fraud Detection and Monitoring- The trained model is world datasets in comparatively much lesser time. [17] Out of
deployed to classify new transactions. Real-time the plethora of neural networks available, we use three
detection prevents financial losses and protects different customized networks. [18] In order, we used the
customers. Continuous monitoring ensures the model's simplest neural network that involved ReLU and sigmoid
effectiveness over time. [13, 23] activation functions with only 31 neurons. The second one
 Additional Considerations- Imbalanced data is involved adding Gaussian noise deliberately to the data in
addressed using oversampling or under sampling. order to reduce the risk of overfitting and increase the
Explainability and interpretability are considered for chances of generalization. [19] The third approach concerned
transparency and compliance. Data privacy regulations itself with the incorporation of algorithms like
and security measures are adhered to. [14] Oversampling, Scaling and Principle Component Analysis
(PCA) for 10 components to extract the important features
The proposed system offers a comprehensive approach to of the data to not only increase the accuracy of the model
safeguard against fraudulent activities. It effectively but also reduce the time it takes to perform its tasks [20].

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Following are the diagrammatic representations of all three approaches

Image 1: Feed forward neural network

Image 2: Neural network architecture

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Image 3: Complete Classification Using PCA

The following is a proposed general outline for the Conclusion

building of the fraud detection model The proposed methodology for fraud detection using deep
 Data Preprocessing learning provides a robust and adaptable approach to
 Feature Engineering identifying fraudulent activities in various domains. [25] By
 Data Splitting leveraging the power of deep learning, the system can
 Model Selection effectively extract meaningful patterns from complex data,
 Model Training adapt to evolving fraud patterns, and provide real-time
 Model Evaluation protection against fraudulent transactions. [24] The
 Handling Imbalanced Data methodology encompasses data preprocessing, feature
 Ensemble Methods engineering, model training, model evaluation, imbalanced
 Threshold Optimization data handling, ensemble methods, threshold optimization,
 Monitoring and Updating monitoring and updating, explain ability and interpretability,
 Explain ability and Interpretability and compliance and security. [26] The implementation of this
 Compliance and Security methodology can significantly enhance fraud detection
capabilities and safeguard organizations from financial
losses and reputational damage. [27]

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