Machine Learning For Bank Security And Fraud Detection 

Machine Learning For Bank Security And Fraud Detection 

Machine Learning For Bank Security And Fraud Detection 

Every chance is accompanied by a threat. The banking sector’s drive to digitization enhanced customer satisfaction and reached previously unbanked groups with new clientele. The drawback was that digital payment methods and online transactions gave scammers new targets to aim at.

According to results of a KMPG fraud survey, cyberattacks are becoming more frequent and severe, costing billions of dollars in losses.

The value of fraud loss in the US by payment method in 2022 is shown in the following graph. With a $1.59 billion loss, bank transfers and payments were the most significant. 

Banking institutions now have to implement new strategies to identify, reduce, and stop financial fraud as a result of these losses. Artificial intelligence (AI), more especially machine learning, is one such technique. 

Everything you need to know about machine learning for fraud detection—its advantages and practical uses—will be covered in this essay. 

Evolution of fraud detection

Conventional fraud detection uses a rule-based methodology. It functions according to a set of guidelines or requirements that establish whether a transaction is legitimate or fraudulent, as the name implies. Typical requirements include the following: is the purchase being made outside of the user’s normal area? and regularity (Is the user’s customary for the quantity and kind of purchases?).

A transaction only completes when all requirements are met. A consumer in Ohio might, for instance, discover a POS charge in New Zealand. Because the location is not within the user’s area code, the transactions are flagged as fraudulent by the system.

This kind of fraud detection system has a few disadvantages.

  • It generates a lot of false positive results. Here’s where you stop money coming in from actual clients.
  • It is unyielding. It is challenging to adjust the rule-based approach to changes in digital banking since it relies on defined outcomes. To detect new types of fraud, the rules must be modified.
  • It is not scalable. The amount of work required to stop it rises along with the amount of data. The system must be manually modified, which is costly and time-consuming. 
  • Fraud detection based on rules functions. But because of its drawbacks, it is inappropriate for use in contemporary digital contexts. It depends on human assistance and is unable to identify trends. 

Additionally, hackers are not bound by a 9–5 schedule and can trick fraud detection systems with advanced techniques like location spoofing and customer behavior impersonation. You therefore require a 24/7 system that is just as sophisticated. 

Now for machine learning. 

Artificial intelligence (AI) known as machine learning employs data to train fraud detection algorithms, which then use the insights and predictions they provide to find patterns and links in the data.

Even if you’re not familiar with machine learning, you already know it. When you interact with an Instagram post, for example, you are feeding the algorithm data about the kind of content you enjoy. It then searches the app for more stuff that is comparable to add to your feed. 

How machine learning will transform fraud detection

Machine learning-based fraud detection in banking is already transforming the sector by enabling faster, more adaptable, and more precise fraud identification and response. 

Based on past and present dangers, the AI system automatically modifies rules by analyzing patterns in customer data. 

Do you recall the New Zealand point-of-sale fee we previously discussed? Machine learning-based fraud detection would take into account the fact that the same credit card has been used to pay for a flight to that destination. The new debit is therefore probably valid. 

Algorithms for detecting fraud are trained using two models: supervised and unsupervised machine learning.  

supervised machine learning

Algorithms are fed massive volumes of data classified as either fraud or non-fraud by the supervised learning model. By examining these instances, the algorithm discovers the patterns and connections that set apart authentic transactions from fraudulent ones. 

Because this learning technique necessitates human data tagging, it takes time to complete. Your data sets also need to be properly labeled and arranged. The accuracy of the algorithm will be impacted by a transaction that is wrongly tagged. 

It also only picks up knowledge from inputs that are part of the training set. Therefore, purchases made using the recently released mobile banking app features that weren’t included in the historical data wouldn’t be marked. Fraudsters can now take advantage of a gap in the system. 

Unsupervised machine learning

The model of unsupervised learning requires little human intervention. The program groups data sets according to similarities and differences, extracting patterns and correlations from vast amounts of untagged data. 

Finding anomalous activity that isn’t in the training data set is the goal. Unsupervised learning therefore continues when supervised learning ends, identifying fresh fraud. 

Recall that using supervised or unsupervised machine learning models is not a necessity. They can be used separately or in conjunction (semi-supervised learning model). 

ML’s advantages for fraud detection

The advantages of machine learning-based fraud detection in banking have been alluded to, but let’s talk more about them. 


Rapid machine learning computations provide real-time fraud decisions. Rule-based algorithms use written rules to detect fraud, even though they make decisions in real time as well. 

  • In brand-new settings without established norms, what happens? False negatives or false positives result from it. 
  • Autonomously identifying novel patterns, machine learning evaluates consistent user behavior to determine suitable responses in milliseconds.
  • Because accuracy rule-based detection systems are unable to pick up on subtle differences in consumer behavior, they either permit fraudulent transactions or reject legitimate ones. 
  • Beyond the set regulations, machine learning algorithms take into account characteristics like past fraudulent activity. By contextualizing the transaction, these variables reduce the number of false positives. 


Reactive and adaptable is machine learning. This system’s capacity for self-learning allows it to adapt to changing conditions and recognize emerging risks. Rule-based systems lack learning capabilities and are inflexible. It can therefore only react to fraudulent activities in accordance with pre-established guidelines. 


Thousands of transaction data points can be analyzed each second by machine learning algorithms. Machine learning can handle repetitive or obvious fraud, saving personnel and administrative costs while investigating low to moderate fraud instances. It enables fraud experts to concentrate on intricate patterns that require human understanding.

The ability to scale

Rule-based systems are under pressure from growing data volumes. The system becomes more complex with new regulations, which makes it harder to maintain. Any inconsistency or mistake could make the entire model useless. 

Conversely, machine learning systems… They not only take in a lot of new information, but they also get better.

Machine learning techniques used in fraud detection

Let’s take a quick look at the operation of the system before we analyze the various algorithms employed in AI fraud detection. 

Entering the data is the first step. The quantity and caliber of the data determine how accurate the model is. The model gets more accurate the more high-quality data you input.

The program then examines the data to identify critical characteristics that distinguish genuine from fraudulent behavior. These features include payment methods (cardholder name and country of origin), location (IP or shipping address), and client identity (email or phone number), among others. 

The algorithm is trained (using additional data) in the third stage so that it can differentiate between legitimate and fraudulent transactions. After being given a training set of data, the model forecasts the likelihood of fraud under several scenarios. You can start using the algorithm as soon as it has been suitably trained.

Let’s now examine the different algorithms that you have access to.

  1.  logistic regression

One type of supervised learning algorithm is logistic regression. Based on the parameters of the model, it determines the probability of fraud on a binary scale (fraud or non-fraud).

The likelihood of fraud is higher for transactions that are on the positive side of the graph than for those that are on the negative. 

  1. The decision tree

While still a supervised learning technique, decision trees are more advanced than logistic regression algorithms. To ascertain if a transaction is legitimate or fraudulent, it employs a hierarchical decision system that evaluates data at several levels. 

An example of a decision tree used to identify credit card fraud is shown below.

The transaction amount is a necessary requirement to determine whether the transaction is fraudulent. The program deems a transaction fraudulent if its value surpasses a predetermined threshold. If not, the tree verifies transaction time, another requirement. It’s probably a hoax if the timing is odd, like this, 3 a.m. If not, a different condition is checked. It continues.

  1. The Random Forest

A random forest is a collection of many decision trees, each of which verifies a distinct set of criteria, such as identification, location, etc.

Each sub-tree provides a choice after all parameters have been verified. The entire sum establishes whether a transaction is legitimate or fraudulent.

  1. Artificial Intelligence

Unsupervised neural networks are intricate algorithms. Neural networks, which take their cues from the human brain, process input at several levels in order to extract high-level information. Deep learning, which can identify patterns in images, text, audio, and other data, works hand in hand with this technique.

This is a neural network in a simple form.

Three layers make up a neural network: input, hidden, and output. Data is processed by the input layer, classified by the output layer, and then analyzed by the hidden layer to find hidden patterns. 

Multiple hidden layers are present in deep neural networks. They work incredibly well at spotting non-linear correlations and unusual fraud situations.

  1. Vector machine support

Algorithms for supervised learning called support vector machines (SVM) can identify, categorize, and forecast anomalies.

Two data sets are shown in this linear SVM demonstration, with a hyperplane—a straight line—between them. The decision boundary is what separates data that is fraudulent from non-fraudulent. 

Further away from the hyperplane, data points are easily categorized. The support vectors that are closest to the hyperplane are the hardest to classify. If these anomalies are eliminated, the hyperplane’s position may change.

  1. The closest K-neighbor

An algorithm for supervised learning is K-nearest neighbor, or CNN. It functions under the presumption that related objects are located nearby one another. 

Here’s a basic example

Either category A or B requires the addition of new data entry. Using the Euclidean distance as a mathematical formula, the program determines the separation between data points. The group with the most neighbors is where the new data point is located. A transaction is deemed fraudulent if the nearest data set has the label “fraud.” 

overcoming obstacles and taking strategic measures

The integration of machine learning for fraud detection has its teething pains, just like any other technology. These are some typical difficulties you might run into.

Insufficient infrastructure

Many financial systems lack the capacity to examine vast amounts of intricate data. In addition, the majority of data is stored in distinct facilities and is divided into silos. 

Regretfully, there isn’t a simple solution for this issue. Purchasing the right hardware and software is required. 

In order to automatically choose the right algorithms for particular data sets, input raw data and prepare it for machine learning, visualize the data, test the algorithm, and more, you’ll need to collaborate with an expert Fintech app development company. 

Security and quality of data

When implementing machine learning for fraud detection, financial organizations must consider the quality of their data. Good and bad data are not distinguished by machine learning models. Therefore, the accuracy of your model will be off if the algorithm is tainted with incomplete or irrelevant data. 

Raw data is gathered, cleaned, and transformed via data ingestion systems like Amazon Kinesis so that machine learning models can use it. You need to separate sensitive and non-sensitive data after it has been cleansed and arranged. Store sensitive data in secure locations and encrypt it. Access to this data should likewise be restricted. 

Insufficient ability

Contrary to popular belief, machine learning isn’t eliminating jobs. In fact, the reverse is true. Fraud analysts are still needed to handle complicated cases that call for human judgment and expertise. Furthermore, there aren’t enough specialists in machine learning because it’s a relatively new technique. 

While this is wonderful news for job searchers, it is not so good for organizations that are unable to fully utilize machine learning. Collaborating with companies who possess the necessary expertise to integrate machine learning can help you get past this roadblock. 

Case studies of machine learning-based fraud detection in banking

Let’s now examine actual instances of machine learning-based fraud detection in banking.

Fraud detection

Danish global financial company Danske Bank was founded in Denmark. It is the biggest bank in Denmark and one of the top retail banks in the continent. With the rule-based detection approach, the bank found it difficult to reduce fraud. Its fraud detection rate was 40%, while its false positive rate was 99.5%.

Danske adopted deep learning technologies to assist in identifying possible fraudulent behavior in collaboration with Teradata, a provider of data software. True positives increased by 50% while false positives decreased by 60% as a result.  

Money laundering prevention  

In the UK, OakNorth is a commercial lending bank that offers personal and business financial services to growing businesses. With one source for anti-money laundering checks and another for clients, the bank’s screening procedure was disjointed. Furthermore, there were a lot of false positives from the politically exposed person (PEP) testing.

In order to expedite compliance and aggregate data, the bank implemented a screening and continuous monitoring solution in collaboration with ComplyAdvantage, a fraud and AML detection firm. This made it easier for the bank’s lending and savings operations to transfer data quickly.

Underwriting of credit

Hawaii One of the top credit unions listed by Forbes Magazine, USA Credit Union is the biggest credit union in Hawaii. It aimed to expand its portfolio of personal loans while lowering risk in order to compete with Fintech businesses.

Using an AI-driven personal loan model, the credit union streamlined its decision-making processes in collaboration with Zest AI. In order to provide more detailed insights than the VantageScore credit scoring system, the model employed 278 factors. As a result, the approvals rate increased by 21%, and the default and loan application fraud rates were zero.

Important things to think about when applying ML to fraud detection

Machine learning-based fraud detection in banking is effective, yet it can be intimidating. In order for these systems to function as well as they should, a large amount of precise data must be provided.

Thus, the following advice will help you maximize the machine learning process.

Restrict the quantity of input variables.

We’ve stated it all throughout this article: more is more. About data volume, that is still accurate. With regard to the quantity of fraud detection variables, nevertheless, fewer is more. 

Typical elements to take into account when looking into fraud are as follows:

  • Email address and IP address
  • Address for shipping
  • Value of an average order or transaction

Reduced features mean faster algorithm training times. Additionally, you stay clear of issues with redundant or unrelated datasets. 

  1. Verify adherence to regulations

Fraud prevention is one aspect of data security. Data privacy is the other. There are regulations in several nations governing the collection, use, and storage of client data by institutions. To just a few, there is the General Data Protection Regulation (GDPR) of the European Union, the California Consumer Privacy Act (CCPA), and the Personal Information Protection Law (PIPL) of China.

The data utilized in machine learning is affected by these laws. Notice and consent is the main tenet of most data privacy compliance laws. Any use of customer data for reasons other than those requested by the user, such as data for machine learning algorithm training, requires notice to the user and their consent. 

Using technological partners with features that comply with regulations is the easiest approach to guarantee adherence to privacy requirements. For example, you ought to collaborate with a banking app development business that knows how to protect the security and privacy of data.

  1. Establish a sensible cutoff point.

Minimum conditions must be met by transaction value rules in order to receive an accept or reject answer. A threshold where security and user experience are balanced is what you want. Overly stringent thresholds run the danger of preventing valid transactions. The likelihood of successful fraud will rise if the barrier is set too low.

Determine your level of risk tolerance to strike the ideal balance. The degree of risk varies depending on the financial product or institution. For instance, a bank offering microlending may have a high bar for low-value loans. Mortgage loans from a commercial bank cannot be given out as liberally.

Looking forward to what lies ahead

Though only 17 percent of firms use machine learning in their anti-fraud strategies, the future is here. Avoid falling behind. 

Here are some advances in machine learning-powered bank security that you may anticipate. 

  • Device profiling involves identifying the various gadgets that are connected to your financial network and examining the characteristics and actions of each individual device. 
  • Automated anomaly detection and response: locate compromised systems and recognize fraudulent activity on recognized devices.
  • Zero-day detection: find malware and vulnerabilities that have never been discovered before to shield enterprises from cyberattacks.
  • Confidential data is automatically identified and anonymized by data masking.
  • Scaled insights: find fraud patterns on several devices and in various places.
  • Creative policy: develop suitable security policies based on machine learning findings.

AI and machine learning have a multitude of potential for fraud detection, regardless of the type of organization—credit union or wealth management. 

It’s important to keep in mind, too, that hackers can potentially get around security measures by utilizing similar technologies. Maintain your edge against these threats by updating your machine-learning models. Human intelligence can also be used to bolster AI-based security.


the guide highlights the significant role of machine learning in bolstering bank security and fraud detection. By leveraging advanced algorithms and techniques, financial institutions can effectively safeguard against fraudulent activities and enhance overall security measures, ensuring the safety of their customers’ assets and transactions.

Fintech is always changing, and making an app like an e-wallet requires a lot of careful planning and the newest technology. Using Appic Softwares as a guide gives you a strategy plan to get through the tough parts, which encourages innovation and makes it possible to create groundbreaking fintech apps in 2024 and beyond.

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