How to Build a Fraud Detection System using Machine Learning Models

In my last blog post, I talked about how to use machine learning models for fraud detection from a business perspective. In this post, I would like to discuss how to build a complete fraud detection system from a technical perspective. I will address the fundamental steps for developing the fraud detection system as well as the key drivers associated with each step. At Indellient, we have used these fundamental steps below to help clients get started from the ground up, from ideation, prototype to development and deployment. 

Step 1: Define project goals, measurement metrics and assign resources  

The first step for any data science project will be defining the project goals: 

  • What are the fraud cases that we wanted to identify?  
  • What kind of analytics techniques have already been implemented to combat fraud?  
  • What are the key measurement metrics that we wanted to focus on when assessing the effectiveness of our fraud detection system?  
  • What and how many developers do we need for developing the fraud detection system?  

Step 2: Identify proper data sources 

Once the business objectives have been confirmed and communicated, we start to identify and collect proper data sources for the fraud detection system.  

The common data sources for detecting fraud includes: 

  • client profile 
  • risk profile 
  • product usage 
  • billing data 

Additional data could also be available from third-party data vendors. For example, for the financial services industry, we will incorporate government compliance data (sanction list, and regulation rules) when building the fraud model. 

Step 3: Design the fraud detection system architecture

There are multiple key factors that needed to be considered when designing the fraud detection system architecture.

Detection frequency determines how often we run the new data through our fraud scoring model.  

Fraud-prevention operation flow impacts how and when we flag different events as suspicious, and how to handle and confirm those suspicious cases afterwards.  

Scoring accuracy baseline helps us to assess the qualification of our fraud scoring model.  

Step 4: Develop the data engineering, transformation, and modeling pipelines 

After we have envisioned the architecture of the fraud detection solution, we will start the development of the data engineering, transformation, and modeling pipelines. I have listed key activities for each of those pipelines in the graph below.  

  • For the data engineering pipeline, we need to ingest and merge the data from different sources, aggregate the data based on business metrics, and set up batch processes.  
  • For the data transformation pipeline, the main goal is to improve the data quality, deal with data issues such as missing & incorrect data and convert the data so that it could be fed into machine learning models. 
  • For the machine learning model pipeline, we focus on building and comparing diversified ML models based on key business metrics. A module for automated model accuracy testing and re-training is a necessity in the production environment to avoid model drifting issue. 

Step 5: Integrate the model into the case management system 

The final step is to incorporate our best performing ML model into the case management system. We can rank the risk level of individual case based on the risk score that we generated. Then, a list of highly suspicious cases will be sent and assigned to relationship managers for further review through the case management system. 


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About The Author

Hello, I am Meina Zhou. I am the Data Science Manager at Indellient. My core expertise lies in the application of proven data science tools and techniques to conduct business analytics and predictive modeling. I have used my business acumen and data science skills to solve business problems. I am a thought leader in the data science world and an active conference speaker. I enjoy public speaking and sharing innovative data science ideas with other people. I have received my Master of Science in Data Science from New York University and my Bachelor of Arts in Mathematics and Economics from Agnes Scott College.