Machine Learning-Powered Financial Fraud Detection: Building Robust Predictive Models for Transactional Security

Abstract

The advances in financial fraud schemes create serious challenges for the institutions responsible for securing monetary transactions in the USA. With the spread of digital payments, fraud has become increasingly common, and a transformation in the techniques of fraud detection has been required in America. The utmost objective of this research project was to curate and test machine learning models aimed at real-time identification of fraudulent financial transactions in the USA. Through the application of cutting-edge data analytics and machine learning techniques, aimed to design predictive models that not only enhance the accuracy of the detection but also the general efficacies of fraud detection mechanisms. The data for our analysis was derived from exhaustive transactional logs, which hold key data necessary for the identification of fraudulent behavior. Every entry in such logs comprises significant attributes like the amount of the transaction, and from it, we got an insight into the patterns of expenditure and the identification of potentially fraudulent transactions per the amount. Further, the time of the transaction is also captured so we can identify unusual patterns at unusual times. The merchant ID has been provided to make it easier to evaluate specific merchants who might have a greater likelihood of fraud, while user location provides insight into geographic anomalies that might represent account takeovers or fraudulent conduct. By using such a vast dataset, we purposed to create in-depth models that improve the identification of and prevention of financial fraud. Three credible algorithms were deployed, notably, Logistic Regression, Random Forest, and XG-Boost. Multiple testing metrics form a complete suite for evaluating how well the fraud detection models perform. The evaluation system incorporates accuracy and precision and recall and F1-score and ROC-AUC as its primary measurement tools. . The performances of the three models were very high, with very close ROC AUC scores of Looking at the bars, the highest score is achieved by XG-Boost, meaning the best generalization capability to differentiate between the classes. Random Forest comes very close but scores marginally better than Logistic Regression. The infusion of sophisticated fraud models into the banking systems is a major step toward the protection of financial transactions in the U.S. financial market. By implementing models like Logistic Regression, Random Forest, and XG-Boost into the operational systems of banks, financial institutions can get real-time fraud detection mechanisms in place that are necessary to act as a safeguard for fraud-related risks. Moreover, such integration into bank systems can be made more efficient through ongoing learning and adaptation. To overcome the described limitations of existing fraud detection models, the combination of deep learning and graph-based fraud detection methods provides a promising direction for augmenting predictive ability.