What Is Fraud Detection?
Fraud detection is the process of finding and stopping dishonest behavior, especially in financial transactions. It uses technology and other methods to identify signs that someone might be doing something wrong. The goal is to find out as soon as possible so that the damage can be limited and stopped.

Fraudsters are always on the prowl, looking for new ways to fleece businesses. But while they're sharpening their knives, fraud prevention measures are also stepping up their game to keep businesses safe. In 2021, the FTC reported $5.9 billion in losses as a result of fraudulent activity — an increase of $2.4 billion over 2020. Nowadays, with the help of machine learning, businesses of all sizes can keep their noses clean and avoid taking a hit. The traditional rule-based systems are no match for the constantly evolving tactics of fraudsters. Therefore, many payment service providers have turned to machine learning to stay one step ahead of the game. In this article, we will dig into the nitty-gritty of how fraud detection machine learning models can help detect fraud and provide an extra layer of security in the payment ecosystem.

Understanding Payment Fraud

When it comes to the payment ecosystem, security is the name of the game. With the convenience of digital payments comes the risk of fraud, and fraudsters are always finding new ways to play dirty. Keeping up with their evolving tactics is no small feat, and real-time fraud detection machine learning can be like finding a needle in a haystack.

Enter machine learning, a game-changer in the fight against payment fraud. By analyzing data and detecting patterns, machine learning algorithms can help catch fraudsters red-handed. According to Statista, 46% of companies use payment fraud detection machine learning to prevent fraud. Payment systems like Corytech can also take advantage of this technology to tighten their security measures and ensure their customers don't get taken for a ride. In the sections that follow, we'll take a closer look at how machine learning can help fight payment fraud.

Types of Payment Fraud

Payment fraud can take on many different forms, with fraudsters constantly finding new ways to exploit vulnerabilities in the payment system. Here are some of the most common types of payment fraud:

  • Identity theft: This occurs when a fraudster obtains someone else's personal information, such as their name, address, and social security number, and uses it to open a new account or make unauthorized purchases.
  • Account takeover: This involves a fraudster gaining access to a legitimate account holder's login credentials, either through phishing or by exploiting weak passwords. The fraudster can then make unauthorized transactions or change the account information.
  • Card-not-present fraud: This type of fraud occurs when a fraudster uses stolen card information to make purchases online or over the phone, where the card is not physically present. These are just a few examples of the types of payment fraud that businesses and individuals need to be aware of.

By understanding the different types of payment fraud, fraud detection in banking using machine learning can take steps to protect clients and their financial information from falling into the wrong hands.

Consequences of Payment Fraud

Payment fraud can have serious financial and reputational consequences for both businesses and customers. As per projections, the worldwide losses incurred by e-commerce due to online payment fraud were approximately 41 billion U.S. dollars in 2022, marking an increase from the previous year. It is predicted that the number will rise further to reach 48 billion U.S. dollars by 2023. Here are some of the potential impacts of payment fraud:

  • Financial losses: Payment fraud can result in significant financial losses for both businesses and customers. For businesses, this can mean lost revenue, increased chargeback fees, and the cost of investigating and resolving fraudulent transactions. For customers, it can mean unauthorized charges on their accounts, as well as potential fees and interest charges.
  • Damage to reputation: Payment fraud can also damage a business's reputation, leading to decreased customer trust and loyalty. This can result in lost sales, negative reviews, and damage to the business's brand.
  • Legal and regulatory consequences: Depending on the severity of the fraud and the industry in which the business operates, there may be legal and regulatory consequences, such as fines, penalties, and lawsuits. Businesses and customers need to take steps to prevent payment fraud and to be vigilant in detecting and reporting any suspicious activity. Financial fraud detection using machine learning can help mitigate the economic and reputational damage caused by payment fraud.

It's important for businesses and customers to take steps to prevent payment fraud and to be vigilant in detecting and reporting any suspicious activity. Financial fraud detection using machine learning can help mitigate the economic and reputational damage caused by payment fraud.

Machine Learning and its Applications in Fraud Detection

While the movie Minority Report portrayed crime prediction as an interactive projection, our current technology relies on fraud detection machine learning algorithms to identify hidden clues left by scammers and cybercriminals. By now, the global market size for machine learning platforms is expected to reach $31.36 billion by 2028. Let's explore this technology's types, algorithms, use cases, adoption guidelines, and the importance of machine learning advisory in countering fraud threats.

What Machine Learning Is

Machine learning is a branch of artificial intelligence (AI) that allows computer software to learn from the data it analyzes, improving its accuracy as it gathers more data inputs. This technology has now been incorporated into various platforms, enabling the detection and prediction of fraud patterns for more accurate prevention. eCommerce fraud detection machine learning is becoming an essential tool for businesses to combat transaction theft and other types of fraud. Its applications extend to various fields such as healthcare, finance, transportation, and more, where it can be used to automate tasks, make predictions, and uncover insights. For instance, North America led the AI in the healthcare market in 2021 and is forecasted to expand growth at a CAGR of 37% from 2022 to 2030.

Traditional Fraud Detection Methods vs. Machine Learning

Fraud detection platforms that use machine learning can identify subtle patterns in payment data that are not easily noticeable. These platforms analyze large amounts of data to uncover hidden correlations between cardholder behavior and the likelihood of fraud. As patterns change over time, machine learning algorithms adapt accordingly. For example, during the COVID-19 pandemic, fraud detection machine learning had to adjust to new transaction patterns caused by consumers being confined to their homes. AI market grew 1,5 times in 2020 compared to 2019 due to the COVID-19 pandemic.

Traditional fraud platforms for merchants rely on a set of static rules to determine which transactions to accept, reject, or review manually. This approach, called rules-based detection, is effective but time-consuming. Fraud detection using machine learning reduces manual processes and is better equipped to detect subtle fraudulent activity that rules-based approaches may miss.





Looks for correlations in payment data to identify suspicious transactions and prevent fraudulent activity

Follows a set of predetermined rules to flag potential fraud, which may miss subtle or new forms of fraudulent activity


Requires fewer additional authentication measures for customers, resulting in a more seamless checkout process

May require more additional information from customers and result in more false positives

Adjustment of Rules

Adjusts algorithms in real-time based on patterns in data

Requires manual updating of rules, which can be time-consuming and may not keep up with the evolving tactics of fraudsters

Fraud Rate

Lower than a rules-based approach

Higher than a machine-learning approach

Machine learning offers more precise fraud detection and prevention capabilities than rules-based systems. Our fraud prevention solution integrates data from billions of transactions and hundreds of fraud detectors, using both static- and self-learning models. Merchants can also customize the solution to meet their specific needs, resulting in maximum prediction accuracy and reduced risk of fraud.

ML possibilities for fraud detection

Machine Learning Possibilities for Fraud Detection

Every merchant should have a fraud prevention strategy. With the help of machine learning, fraudulent transactions can be identified with higher accuracy and lower false positives, allowing businesses to flag suspicious activities without relying on gut instincts.

Data Collection and Preprocessing

To get the machine learning system on the right track, the data it munches must be top-notch. As the old saying goes, "Garbage in, garbage out." More data is better, but only if it's the right data. It has to be curated and tailored to the specific needs of the business.

Once the data is ready to roll, extracting the good stuff is time. This is where you decide which features to focus on to get the job done right. For example, in eCommerce online fraud detection, you might want to zoom in on transaction data, website interactions, or connections to your service, and pinpoint behaviors that set off red flags for fraud.

Once they've identified the relevant data, they can start to preprocess it. This involves sorting it out, cleaning it up, and getting it ready for machine learning algorithms to do their thing. It's like preparing a meal for a picky eater – you need to chop the vegetables, remove the bad parts, and make sure everything is in order. Once the data is preprocessed, the machine learning models can learn from it and improve their accuracy over time.

Model Training and Validation

Once the relevant features have been identified, an algorithm is put into action on the training data. This algorithm acts as a set of rules to determine whether interactions are fraudulent or not. After this step, you'll have a credit card fraud detection machine learning model that can predict future suspicious activities with a high degree of confidence. The way this decision-making process works depends on the type of algorithm used.

The last step is to test the model in a sandbox environment. Before unleashing it on live data, you can test it on actual historical data to evaluate its performance. Supervisors can monitor and adjust the rules based on how well the model performs and how accurate its predictions are. They can also identify any potential problem areas or false positives before releasing them into a live environment.

Real-time Fraud Detection and Prevention

Let's talk about how machine learning models help to catch fraudsters in real time, beefing up the security of the payment system.

Imagine the customers buying something online or logging into their bank account. The system that checks for fraud can tell if their purchase or login is typical of their past behavior or if it's unusual based on where they are and what they are doing. This helps prevent fraud and keep your information safe. Big companies like Mastercard use this technology to protect their users when shopping online or accessing their accounts.

With these models, fraudsters are caught red-handed, and their attempts at trickery are quickly shut down with credit card fraud detection using machine learning, for example. This ensures that honest people don't lose their hard-earned cash, and merchants don't face any chargebacks or penalties. The models are continually learning from new data, adapting to new tricks and patterns, and getting better and better at stopping fraudsters in their tracks.

Key Benefits of Machine Learning-based Fraud Detection: Corytech’s Insights

Corytech is a payment system company that utilizes machine learning for fraud detection to enhance the security of the payment ecosystem. We will explore the key benefits of this technology, including improved accuracy, scalability, and adaptability, as well as enhanced customer experience.

Improved Accuracy and Reduced False Positives

In simple terms, machine learning in fraud detection can help detect fraud more accurately by reducing mistakes and false alarms. This means that the system can identify fraudulent activities more precisely, while also minimizing the chance of flagging legitimate transactions as fraudulent. In other words, it's like having a sharp-eyed detective on the job, who can spot the crooks and keep the innocent from being wrongly accused.

Scalability and Adaptability

Machine learning models can also adapt to new types of fraud and changing trends, making them scalable and flexible. This means that as fraudsters develop new tricks, the system can quickly learn how to spot them and prevent them from succeeding. It's like having a chameleon that can change its colors to blend in with the environment, making it difficult for predators to detect and attack.

Enhanced Customer Experience

Moreover, machine learning-based fraud detection can provide a seamless and secure payment experience for customers. Reducing the need for manual review and intervention, it can make the payment process faster and more convenient. This means that customers can enjoy a hassle-free experience, without worrying about fraud or security issues. It's like having a personal bodyguard who keeps you safe and protected, without getting in the way of your daily activities.

Machine Learning Fraud Detection FAQ

How banks are using machine learning to detect fraud?

Banks are increasingly turning to machine learning to detect fraud and enhance their security measures. By analyzing vast amounts of data, including transaction history and customer behavior, machine learning algorithms can quickly identify patterns and anomalies that may indicate fraudulent activity. These systems can also adapt and evolve over time, learning from new data and detecting emerging fraud trends. By leveraging the power of machine learning, banks can improve their ability to detect and prevent fraud, ultimately providing greater security and peace of mind for their customers.

What are the challenges in fraud detection using machine learning?

One of the challenges is the quality and relevance of data, as machine learning algorithms heavily rely on data quality. Another challenge is the constantly evolving nature of fraud, which requires continuous monitoring and updating of the algorithms to keep up with new patterns and trends. Additionally, false positives and false negatives can occur, leading to potentially costly errors. Lastly, privacy concerns can arise when using personal data for fraud detection, requiring careful handling and adherence to legal and ethical guidelines.

What are the 2 real-time machine learning fraud detection methods?

There are two types of real-time machine learning fraud detection methods: supervised and unsupervised. In supervised machine learning, the system is trained with labeled data to recognize patterns of fraudulent behavior. It uses these patterns to detect fraudulent transactions in real time, comparing new transactions to the labeled data set. On the other hand, unsupervised machine learning does not rely on labeled data. Instead, it uses algorithms to identify unusual patterns or anomalies in the data, which may indicate fraudulent activity. The system learns on its own and improves over time as it processes more data.

What’s Next?

Machine learning plays a crucial role in enhancing the security of the payment ecosystem. As fraudsters continue to evolve their tactics, payment companies must keep pace with the changing landscape. Implementing machine learning-based fraud detection can significantly increase accuracy, reduce false positives, and enhance the customer experience.

Therefore, it is recommended that companies choose a payment provider with machine learning implemented for fraud detection. Corytech, with its innovative and fully-featured platform, can assist any business in achieving this goal.

If you are interested in seeing how Corytech can help your business, request a personalized demo today.

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Vyacheslav Bondarenko
Co-founder of Corytech