Credit Card Fraud Detection Using Machine Learning Techniques

1. Introduction
1.1 Problem Statement:
Credit card fraud poses a significant challenge to financial institutions due to the rapid
increase in online transactions and the sophistication of fraudulent techniques. Detecting
fraudulent transactions in real time is difficult because they are rare, vary greatly, and evolve
over time. This project applies machine learning techniques to detect fraudulent credit card
transactions by analyzing historical data, identifying patterns, and building predictive models
to improve fraud detection accuracy and reduce financial losses.
1.2 Objectives:
1. Develop a machine learning model to detect fraudulent credit card transactions.
2. Analyze and preprocess transaction data for effective model training.
3. Address class imbalance issues commonly present in fraud datasets.
4. Evaluate different machine learning algorithms for fraud detection performance.
5. Deploy a practical and scalable fraud detection system for real-time use.
1.3 Scope:
1. Focus on detecting fraudulent transactions from anonymized credit card datasets.
2. Use historical transaction data (features such as time, amount, and anonymized
variables).
3. Implement supervised machine learning algorithms (e.g., Random Forest, Logistic
Regression, XGBoost).
4. Address class imbalance using resampling techniques such as SMOTE or
undersampling.
5. Benefit financial institutions by improving fraud detection accuracy and reducing
false positives.

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Post Graduate Diploma in AI & DS, GHRCEM, Pune
 Credit Card Fraud Detection Using Machine Learning Techniques

2. Methodology
1. Data Collection:
 Used publicly available dataset from Kaggle containing credit card transactions made
by European cardholders in September 2013.
 The dataset contains 284,807 transactions, with 492 labeled as fraudulent.
2. Data Preprocessing:
 Handled missing values and ensured data quality.
 Normalized the Amount and Time features for consistent scaling.
 Addressed class imbalance using SMOTE (Synthetic Minority Over-sampling
Technique).
3. Exploratory Data Analysis (EDA):
 Plotted distributions of fraudulent vs. non-fraudulent transactions.
 Identified key patterns such as higher fraud likelihood at specific time intervals.
 Analyzed correlations between anonymized features (V1–V28) and fraud labels.
4. Model Selection:
 Evaluated multiple machine learning algorithms including:
 Logistic Regression
 Random Forest
 XGBoost
 Support Vector Machine (SVM)
 Chose Random Forest and XGBoost for best performance with imbalanced data.
5. Model Training:
 Split data into training (70%) and testing (30%) sets.
 Trained models with cross-validation and hyperparameter tuning using
GridSearchCV.
6. Model Evaluation:
 Used metrics suitable for imbalanced classification:
 Precision, Recall, F1-Score, AUC-ROC
 Compared models based on confusion matrix results and ROC curves.
7. Real-Time Implementation:
 Simulated streaming transactions to evaluate real-time fraud detection.
 Designed an alert system to flag transactions exceeding a prediction threshold.
8. Optimization and Deployment:
 Tuned model thresholds to balance false positives and false negatives.
 Prepared model for deployment via a REST API using Flask.
9. Validation and Feedback:
 Validated model using new transaction samples.
 Gathered stakeholder feedback to improve interpretability and integration.

3. Results & Discussions

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Post Graduate Diploma in AI & DS, GHRCEM, Pune
 Credit Card Fraud Detection Using Machine Learning Techniques

The best-performing model (XGBoost) achieved the following results on the test set:
 Precision: 0.93
 Recall: 0.87
 F1-Score: 0.90
 AUC-ROC Score: 0.98
These results indicate strong performance in correctly identifying fraudulent transactions
while minimizing false positives.

Analysis of Feature Importance:

 V17, V14, V12: Strong indicators of fraud.
 Transaction Amount: Slightly higher in fraudulent cases.
 Time: Fraudulent activity often clustered in shorter time spans.

Strengths of the Model:

 High accuracy and robustness to class imbalance.
 Capable of identifying subtle patterns in anonymized features.
 Scalable to handle real-time transaction monitoring.

Limitations:
 Anonymized features limit interpretability of the model.
 Model performance may vary on data from different regions or newer fraud
techniques.
 Lack of contextual data (e.g., IP address, merchant category) limits fraud pattern
analysis.

Future Enhancements:
 Incorporate additional contextual features like user behavior or geolocation.
 Use deep learning models such as Autoencoders for unsupervised anomaly detection.
 Implement real-time fraud prevention by integrating with transaction APIs.
 Regularly update the model with new fraud cases to maintain accuracy.

4. Conclusion
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Post Graduate Diploma in AI & DS, GHRCEM, Pune
 Credit Card Fraud Detection Using Machine Learning Techniques

This project successfully developed and evaluated a machine learning-based system for credit
card fraud detection. The XGBoost model demonstrated high precision and recall, making it a
viable solution for detecting fraudulent transactions in real-world scenarios. By addressing
challenges such as class imbalance and real-time detection, the system enhances fraud
prevention capabilities for financial institutions. Future improvements can further increase
accuracy, adapt to evolving fraud strategies, and expand applicability across global payment
systems.
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Post Graduate Diploma in AI & DS, GHRCEM, Pune