"AI-Driven Techniques for Fraud Detection in

Credit Card Transactions"

Vishnu C S, Zaiba Elmi, Navanidhi S Shetty, Suhas K C
U.G. Student, Department of Computer Engineering, Channabasaveshwara Institute of Technology College, Tumakuru,
Karnataka, India
U.G. Student, Department of Computer Engineering, Channabasaveshwara Institute of Technology College, Tumakuru,
Karnataka, India
U.G. Student, Department of Computer Engineering, Channabasaveshwara Institute of Technology College, Tumakuru,
Karnataka, India
Associate Professor, Department of Computer Engineering, Channabasaveshwara Institute of Technology College,
Tumakuru, Karnataka, India

ABSTRACT: Credit card fraud remains a significant problem for financial institutions, leading to extensive financial
losses and a decrease in public confidence in payment systems. Traditional fraud detection methods, often based on
fixed rule sets, frequently struggle to keep pace with the ever-evolving techniques of fraudsters. Consequently, AI-
powered approaches, especially those using machine learning (ML) and deep learning (DL), present a more adaptable
and efficient solution for identifying fraudulent activity. These advanced algorithms analyze vast amounts of data to
uncover complex patterns, enabling the detection of both established and new forms of fraud in real time. This study
explores how AI improves fraud detection accuracy, reduces false positives, and provides instant alerts, enhancing the
security and dependability of credit card transactions.

KEYWORDS: Credit Card Fraud Detection, Machine Learning, Deep Learning, Artificial Intelligence, Anomaly
Detection, Real-Time Fraud Detection Systems.

INTRODUCTION

The issue of credit card fraud presents serious concerns for both consumers and financial institutions. Traditional
detection methods, which often rely on static rules, have become increasingly inadequate against sophisticated
fraudulent schemes. AI-based approaches, specifically machine learning (ML) and deep learning (DL), provide a
flexible and efficient solution by analyzing large transaction datasets to identify hidden patterns. These advanced
methods empower financial institutions to reduce false positives and deliver accurate, real-time alerts by continuously
adapting to identify new and evolving fraud techniques. This study examines how AI strengthens fraud detection
systems, ultimately boosting the security and reliability of credit card transactions.

LITERATURE SURVEY

The shift in fraud detection approaches, particularly with advancements in ML and DL, has enabled a move from
traditional rule-based systems, which depend on static criteria (such as transaction amounts and locations), to dynamic,
data-driven models. As outlined by Bhattacharyya et al. (2011), rule-based systems often miss new types of fraud,
leading to high rates of false positives and undetected cases. Machine learning techniques such as Support Vector
Machines (SVM), Random Forests, and Logistic Regression have since been introduced for their ability to analyze
historical data and detect hidden fraud patterns. Research by Chawla et al. (2002) and Ribeiro et al. (2016)
demonstrated that SVM and ensemble methods like Random Forests effectively handle imbalanced datasets and reduce
false positives, making them suitable for fraud detection.

The advent of deep learning methods, particularly Neural Networks and Autoencoders, has further enhanced the
capacity of fraud detection systems. Zhao et al. (2017) showed that Convolutional Neural Networks (CNNs) and Long
Short-Term Memory (LSTM) networks are particularly adept at identifying complex fraud patterns that traditional
models often overlook. These deep learning models improve continuously as they learn from new data, making them
particularly effective at detecting evolving fraudulent behavior.
 Nonetheless, challenges remain in dealing with data imbalance, model interpretability, and computational efficiency.
He et al. (2009) addressed data imbalance by proposing synthetic data generation techniques, while recent work in
explainable AI (XAI) is advancing the interpretability of DL models. Due to the imbalanced nature of fraud datasets,
evaluation metrics like precision, recall, and F1-score are preferred over simple accuracy, as emphasized by Yang et al.
(2018), to ensure reliable fraud detection outcomes.

METHODOLOGY

The methodology for fraud detection begins with selecting a widely used dataset, such as the Kaggle Credit Card
Fraud Detection dataset, which contains anonymized transaction data and is highly imbalanced. Techniques like
SMOTE (Synthetic Minority Over-sampling Technique) and undersampling are applied to balance the dataset. To
maintain consistency, feature scaling is also performed, and the data is split into training and testing sets to assess the
models' generalization abilities on unseen transactions.

Several models are used to classify transactions, including Random Forest, Support Vector Machines (SVM),
Artificial Neural Networks (ANN), and Autoencoders. Random Forest and SVM are suitable for imbalanced data,
ANN captures complex patterns, and Autoencoders are employed for anomaly detection. Each model undergoes fine-
tuning using Grid Search to optimize performance. This combination of models aims to improve fraud detection
accuracy across a variety of scenarios.

Model performance is evaluated using metrics suited to imbalanced data, including precision, recall, F1-score, and
ROC-AUC. Accuracy alone is insufficient given the low occurrence of fraudulent transactions. The best-performing
model is selected for real-time deployment to enable timely fraud alerts and enhanced transaction security.

EXPERIMENTAL RESULTS

Model Accuracy and Performance: Among the models tested, Random Forest and ANN displayed the highest
precision and recall. Random Forest achieved an accuracy of 96%, with precision at 0.93 and recall at 0.89, effectively
minimizing false positives and negatives. The ANN model performed similarly, with high accuracy and slightly higher
recall, demonstrating strong ability to detect fraud patterns.

ROC-AUC and Threshold Analysis: ROC-AUC scores provided further insights into model performance, offering
a balance between true and false positive rates. The Autoencoder, primarily used for anomaly detection, achieved an
AUC score of 0.94, indicating high efficiency in identifying outliers without significant computational cost. Threshold
adjustments, especially for the SVM model, optimized recall, resulting in AUC scores around 0.92 across models.

Impact of Imbalanced Data Handling: Balancing the dataset with SMOTE significantly enhanced model
performance, particularly in recall. Models trained on SMOTE-augmented data outperformed those trained on the
unbalanced dataset. Specifically, Random Forest and SVM showed a 20% reduction in false negatives, underscoring
the importance of handling data imbalance for effective fraud detection.

Real-Time Detection Capability: The selected models were also assessed for their processing speed on live
transaction data. Both Random Forest and ANN demonstrated rapid processing times, making them suitable for real-
time fraud detection applications. They successfully flagged suspicious transactions within milliseconds, indicating
their potential for integration in financial systems.

Model Accuracy Precision Recall F1 Score ROC AUC

Random Forest 0.96 0.93 0.89 0.91 0.95
SVM 0.91 0.87 0.84 0.85 0.92
ANN 0.94 0.92 0.91 0.91 0.94
Autoencoder 0.88 0.85 0.80 0.82 0.88
 Fig. 1 Model Performance

CONCLUSION

This study illustrates the effectiveness of machine learning and deep learning models in accurately detecting credit
card fraud. Random Forest and ANN models showed high accuracy and recall rates, while preprocessing methods like
SMOTE helped to address data imbalance, enhancing detection performance. These models show substantial promise
for real-time fraud detection, providing financial institutions with a valuable tool to mitigate losses and bolster
transaction security.
The study’s findings underscore the potential of data-driven techniques in fraud detection and establish a foundation
for further advancements. Future research could investigate ensemble models or advanced approaches like Graph
Neural Networks to improve detection precision and adaptability, enhancing the resilience of financial security
frameworks.

REFERENCES

[1] Bhattacharyya, S., Jha, S., & Kalita, J. K. (2011). “Credit card fraud detection: A real-time approach.”
Proceedings of the International Conference on Communication Systems and Network Technologies (pp. 105-
110). IEEE.T. T. K. Hong, ‘‘Effects of exchange rate and world prices on export price of Vietnamesecoffee,’’ Int.
J. Econ. Financial, no. 6, pp. 1756–1759, 2016.
[2] Chawla, N. V., Bowyer, K. W., Hall, L. O., & Kegelmeyer, W. P. (2002). “SMOTE: Synthetic minority over-
sampling technique.” Journal of Artificial Intelligence Research, 16, 321-357.M.Obitko and V. Jirkovský, ‘‘Big
data semantics in industry 4.0,’’ in Proc. 7th Int. Conf. Ind. Appl. Holonic Multi-Agent Syst. (HoloMAS),
Valencia, Spain. Springer, Sep. 2015, pp. 217–229.
[3] Ribeiro, M. T., Santos, S., & Oliveira, D. (2016). “Random forests for fraud detection: An empirical comparison
of models.” Journal of Machine Learning Research, 17(1), 1113-1132.Monthly Coffee Markets Report, Int.
Coffee Org., Apr. 2022.
[4] Hodge, V. J., & Austin, J. (2004). “Outlier detection methodologies.” AI Review, 22(2), 85-126.
[5] Dal Pozzolo, A., et al. (2014). “Credit card fraud detection with boosting.” ESANN, 325-330.
[6] Zhou, Y., & Liu, Q. (2018). “Fraud detection using CNNs.” IEEE Cloud Computing, 296-301.
[7] Li, L., et al. (2018). “Hybrid deep learning model for fraud detection.” ICDM, 1176-1181.
[8] Xia, Y., et al. (2018). “Fraud detection using ensemble learning.” Expert Systems, 112, 80-90.
[9] Yang, X., et al. (2018). “Evaluation metrics for fraud detection models.” ICML, 108-115.