Machine Learning for Fraud Detection: Best Models and Techniques

By SQream

11.14.2023 twitter linkedin facebook

When it comes to finances and digital transactions, in particular, the battle against fraud is intensifying. Organizations are scrambling to leverage advanced technology to fortify their defenses, and machine learning (ML) has become a powerful ally in this fight. When using machine learning for fraud detection, many sophisticated models and techniques can analyze vast datasets, find anomalies, and adapt to patterns of fraudulent behavior as they evolve. But what are some of the best machine-learning techniques and models? What are the specific challenges, strengths, and real-world applications for companies today?

Dealing with the Modern-Day Fraud Landscape

Fraudulent activities can come in all shapes and forms. These can include identity theft, insider trading, credit card fraud, etc. Due to these diverse threads, it can often be difficult for traditional rule-based systems to keep pace. It is little wonder that organizations turn to machine learning for more intelligent and adaptive solutions.

Companies need to rely on quality data and features used by machine learning models to detect fraud successfully. This “feature engineering” means selecting and transforming certain data attributes to boost model performance. These features may include geographical location, device information, transaction amount, frequencies, and user behavior. Some data needs to be preprocessed to handle scaling, normalization, and missing values and to ensure that the machine learning algorithms are more effective.

Supervised Learning

What models and techniques are available?

Logistic Regression

One of the top supervised learning algorithms is Logistic Regression. This is used for binary classification problems and is suitable for fraud detection. This algorithm models the probability of an event taking place based on relationships between the log odds of the event and independent variables. It’s simple, computationally efficient, and interpretable, so it’s an excellent choice for those companies who seek quick fraud detection.

Decision Trees/Random Forests

These powerful ensemble learning techniques do particularly well with complex datasets. Decision Trees use a trunk and branch model for decisions based on data features. Random Forests combine multiple decision trees for enhanced accuracy. Both models are great at capturing intricate patterns in fraud data and work with emerging fraud threats as well as those that are better known.

Support Vector Machines

This versatile supervised learning algorithm works well in high-dimensional spaces. It identifies the hyperplane that most effectively separates data into different classes and is useful where fraud instances are not easily separable.

Unsupervised Learning Models

These models can be further broken down into several powerful classification algorithms.

Clustering Algorithms

These include options such as DBSCAN, Agglomerative Clustering, and K-Means, which can detect anomalies without any labeled data. They group similar data points together and target outliers, which often indicates fraudulent activities. Through clustering, companies can uncover patterns of abnormalities that would otherwise go unnoticed when they only use traditional, rule-based methods.

Isolation Forest

This algorithm detects anomalies by isolating any instances that deviate from normal standards. It does so by constructing random decision trees and isolating anomalies with shorter average path lengths. The solution is scalable, efficient, and best suited for detecting outliers in large datasets. It’s another popular choice in fraud detection.

Deep Learning and Neural Networks

The architecture of the human brain inspires these more sophisticated models.

Artificial Neural Networks

Artificial neural networks are capable of handling complicated and nonlinear relationships in data. They’ve been successfully applied in fraud detection due to their ability to learn intricate patterns and representations from the presented data. Unfortunately, neural networks often need substantial computational resources and large amounts of labeled data for training. This can sometimes put them out of the reach of certain organizations.

Recurrent Networks and Long Short-Term Memory

Both these solutions are specialized neural network architectures. They are designed to handle sequential data and work well for time/series fraud detection. Both excel at capturing temporal dependencies and patterns within transactional data. This makes them particularly good for detecting fraudulent activities that may evolve over time.


These unsupervised deep learning models learn about efficient data representations by reconstructing input data. They can be trained on normal fraudulent data and will flag instances of high reconstruction errors as possible fraud. They are good for identifying new types of fraud and detecting subtle anomalies.

Real-World Applications for Machine Learning Techniques

In the real world, these solutions can prove invaluable. For example, machine learning models are widely used today to detect real-time credit card transaction anomalies. They can analyze features such as location, frequency, and transaction amount to identify possible fraud.

In the world of healthcare, machine learning models assist in identifying fraudulent healthcare transactions in insurance claims. Here, they identify any anomalies in patient records, billing patterns, or treatment procedures by flagging them for further investigation.

Sophisticated machine learning models also help e-commerce companies combat specific fraudulent activities. They analyze user behavior and transactional patterns to help counter account takeovers, fake reviews, or payment fraud.

Today, a diverse array of models and techniques are available in the ongoing battle against fraud. Organizations can stay one step ahead of ever-evolving threats by using traditional supervised learning models or more sophisticated deep learning architectures.

Still, certain challenges such as model explainability, imbalanced datasets, and the threat of adversarial attacks must also be taken into account to ensure fraud detection systems are effective and trustworthy. After all, fraudulent activities may often be rare compared to a wealth of legitimate transactions, which could result in imbalanced datasets. If datasets are out of balance, this could lead to biased models that seem to perform well in the majority class but find it hard to detect minority-class fraud.

To counter certain challenges calls for collaboration between human expertise and machine learning innovation to help secure the digital landscape against such fraudulent activities.

Going Further with SQream

If you’d like to learn more about machine learning models and techniques, get in touch with SQream. We can help enhance your AI, machine learning, and fraud detection capabilities – book a demo today to see how.