How We Used Data Analysis to Detect Fraudulent Transaction

Transaction fraud is a problem that financial companies are constantly facing. And ordinary customers suffer from it either. However, if you learn to detect such frauds in time, the situation will improve significantly. Happily, special types of data analysis can become great assistants in such a matter.

This is what our article is devoted to. We're going to discuss the issue of online transaction fraud detection and describe the main data analysis steps to achieve the desired. And we won't limit ourselves to theory alone. We'll give you an actual example of our own practice.

Let’s get started!

Key Takeways
Using stolen payment information to purchase products and services is known as transaction fraud. Cybercriminals either buy payment information from dark web forums or steal access from poorly protected business databases. When the victims check their statements and discover one or more fraudulent purchases, they are frequently ignorant and submit a chargeback.
Although transaction fraud affects all firms to some extent, it's critical to keep it as minimal as possible. Transaction fraud can have a significant negative impact on a firm by:

Chargebacks. If there are too many of them, your bank or payment processor can decide to impose fees. Businesses that receive an excessive amount of chargebacks may pay $100 or more for each chargeback.

Processing fees. In any case, on the off chance that an exchange is deceitful or not, you will in any case need to pay handling expenses. All things considered, the installment processor has still accomplished the work. These costs, which can quickly add up to a significant sum, typically range from one percent to four percent of the credit card transaction.

Lost Time. Shift Processing gauges that just 60% of shippers question their chargebacks, and just 21% win those debates. A relentless cycle's supportive of the buyer except if you have hard proof to demonstrate the exchange was false. So you need high-level software protection technology support on devices against vulnerabilities and attack on your company.


How does fraud happen?

No prominent features promptly show questionable malware threats. Alternatively, you are able to identify internet scams by closely observing the small red flags outlined below. As the number increases, a transaction meets these criteria, the larger the likelihood you are handling attacks.


Mismatched Addresses

Confirm if the recipient address corresponds to the billing address. If it fails, validate the mailing address is distant from the address used for billing. Does it separate from the contact details that their bank has in their records? Has your client sent products to that place in the past? One can make numerous inquiries concerning destinations to find out whether a transaction is uncommon or else.

Unusual Orders

Frequently, hackers attempt to process inaccurate financial information via your networks to discover the transaction specifics they do not possess at present. This consists of data such as the verification code or lost cardholder account numbers. This is done by them by buying small goods or by asking for a remarkably high quantity of products. Frequently over the duration of a brief interval. Especially the ones that take place extremely fast no human could have produced them. Indications of automation in the process of placing an order are commonly obvious signs of deceptive behavior.

Rush Shipping

Buyers who purchased products featuring the mentioned symbols wish for their goods for express delivery or expedited delivery. It is likely, once your items are delivered accompanied by them, that the consumers will be gone from the radar. Another person will ultimately request from you a reversal in a transaction they did not perform.


Fraudulent transactions

In the KPMG international study on banking risks, fraud and scams are included in the top 5 challenges, which banks are being confronted with. As 60% of respondents from the information security services of financial organizations admit, they recently noticed the activation of cyber fraudsters, which led to significant losses.

But what is transaction fraud? What types of scams are there and what do bank clients complain about?

We’ll list some of the most popular cases: 

  • the creation of so-called “clone cards”. Fraudsters read secret information from the user's card’s magnetic stripe and then make “white cards” - pieces of plastic with a magnetic stripe and stolen information printed on them. After that, attackers can freely use the account of the real cardholder;

  • phishing when secret card data is received from the user himself. There are a lot of phishing instances, and the most striking one is when attackers contact users on the bank's behalf (presumably) - usually by email or SMS. Cyber-crooks convince users that important changes are being made in the banking security system (or they come up with another convincing excuse to get what they want). Also, scammers ask unsuspecting bank clients to renew their private card information, either by sending a response letter or by filling out the attached form;

  • another example of financial transaction card fraud is the case when the user is convinced to transfer his money to the account of the attacker (of course, this poor fellow doesn’t suspect a thing, he’s quite sure he’s dealing with a trustworthy company);

  • conversion of a check stolen by an attacker.

Problem with fraudulent transactions
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Okay, we've discussed the fraud issue, and now it's time to consider which data analysis to use to avoid these problems. Moreover, we'd like to share with you our own experience and describe a real-life case.

So let's take a look at our financial data analysis example.

What was the primary task?

It all started with the fact that a reputable European company requested our assistance. Its owners instructed us to help them quickly and efficiently identify fraudulent card transactions. As you already understood, this problem is much more serious than it might seem and causes a lot of trouble for financial institutions.

We were provided with a set of transactions of bank accounts (cards) for two payment systems, some of which were fraudulent. And we had to create a reliable transaction fraud detection algorithm.


The data was a collection of transaction information by day. From this point of view, it was considered as a time series {yt}, in which frauds were allocated according to a special algorithm. The result was 2 time series: “normal” payments {yn} frauds {fn}.

In Figure 1, normal payments {yn} marked in blue, and frauds {fn} are highlighted in red.

data analysis

Figure 1

The initial approach to financial data analysis

To analyze the structure of the {fn} series, standard tests were used: the extended Dickey-Fuller test aimed at detecting the presence of unit roots and the Kwiatkowski-Phillips test for stationarity of the series. Both showed the stationarity of the series {fn}, namely, Δfn~I(0).

Using smoothing (the red curve in Figure 2), the optimal curve was selected to make a further forecast (Fig. 3).

fraud transaction

Figure 2

financial data analysis

Figure 3

Despite the fact that the series was stationary, we used the ARIMA model (ARIMA (1,1,2), which gave an acceptable result.

Another way to solve the problem

The above outcome is more or less satisfactory, however, there is a small problem. The thing is, the fraud forecast, like any forecast related to the time series, has a confidence zone of the result expanding according to the quadratic law. To be precise, only 2-3 forecast periods (in our case, 2-3 days) can be considered the relevant result. In addition, online transaction fraud detection occurs much later than when it really happens, which forces us to take into account the compensatory amount.

These findings got us to reconsider the approach to solving the problem. And we found another way to implement the analysis of financial data.

We reached the conclusion that it would be more convenient to implement a different principle and first determine the type of payment: normal payment, suspicious one, or fraud. Then it all comes to the classification of the main components in space using the methods of nearest neighbors or neural networks.

The initial approach to financial data analysis
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Now, after describing the approximate data analysis process, we'd like to tell you where else it can be used (in addition to detecting financial transaction card fraud).

More options to use data analysis techniques

So where and when should you apply big data analysis? We'll provide some of the most obvious and sought-after examples.

#1. Classic analysis

Here we're talking about statistics in all its forms. As you know, the activity of people in many cases involves working with data, which includes the study, processing, and analysis of information. What's more, the main characteristic of statistical analysis methods is their complexity.

A statistical study and related data analysis can be performed using the following methods:

  • Statistical observation;

  • Grouping of materials of statistical observation;

  • Absolute and relative statistical values;

  • Variation series;

  • Competent sampling;

  • Correlation and regression analysis;

  • Rows of dynamics.

#2. Modeling

In this case, we’re dealing with neural networks and classification methods, which are an important part of modern machine learning techniques.

Let's give an example of the problem the classification solves.

Imagine that there are many elements (situations) divided into specific classes (let’s name these elements the initial set). Also, you have a finite set of objects, and you know which classes they belong to. Such a set is called a training sample. What classes the remaining objects belong to is unknown. You have to construct a data analysis algorithm capable of classifying an arbitrary element from the initial set.

The algorithm you created can be used to solve the following problems:

  • Assessment of creditworthiness of borrowers;

  • Prediction of customer attrition;

  • Optical character recognition;

  • Speech recognition;

  • Spam detection;

  • Classification of documents.

#3. Web scrape

Let’s talk about another case when we might need data analysis techniques, namely, web scraping.

In a broad sense, web scraping is the collection of information from various Internet resources. The useful data category may include:

  • catalog of goods;

  • all sorts of images;

  • videos;

  • text content;

  • open contact details - email addresses, phone numbers, etc.

#4. Social Network Analysis, or Graph Theory

Graph theory belongs to discrete mathematics and is widely used in solving various problems in different fields of activity, including economics, programming, communication, and sociology.

Using social graphs, we deal with the following issues:

  • user identification;

  • social search;

  • generation of recommendations helping to choose “friends”, media content, and news;

  • identification of "real" relationships;

  • collecting open information for graph modeling.

Though, the data analysis process in the case of social graphs is associated with a number of difficulties, such as differences in social networks and closed social data.

#5. Medical research

Analysis of medical data allows you to bravely face such problems as:

  • Medical research planning and data collection;

  • Calculation of the main descriptive characteristics of the studied values;

  • Visual representation of data through the construction of such graphs as histograms, scatterplots, etc.

  • Identifying statistically significant differences between samples;

  • Analysis of dependencies between factors;

  • Survival analysis;

  • Calculation of the required sample size;

  • Prediction of treatment outcome.


We've examined the key data analysis steps and described how to implement transaction fraud detection. And we sincerely hope our review would be useful to you.

Other options to use data analysis techniques
Do you need to conduct a competent analysis of financial data (or data related to any other field of activity)? Contact us, we'd be happy to assist you!



What is Transaction Fraud?

Criminals utilize payment card details to complete transactions on the Internet. That may negatively impact your organization over time. If the valid cardholder realizes the transaction, they will start a chargeback process (refund). This method can be costly to handle.

Companies are highly motivated to prevent fraudulent transactions before their occurrence.


How Does It Work?

There are numerous categories of payment card fraud. The most frequent occurrence takes place when malicious individuals acquire payment card data using phishing schemes, data breaches, or stealing.

Criminals procure financial card details on hidden online networks.

- They buy commodities and services through the Internet with it.

- The customer discovers an abnormal transaction and initiates a dispute.

- Your company must refund the purchaser, and settle chargeback processing fees.

This places a substantial weight on the company to prevent payment fraud without delay. And regrettably, the present pattern indicates that the majority of companies can expect a growth in dispute rates.


Methods to Determine if You Require Financial Fraud Detection?

And just in case you aren’t sure of what they are: it is a safeguard established by payment network operators to guarantee businesses are not being defrauded by businesses. This enables users to challenge a payment and get their money back.

In case you begin receiving a high amount of refund requests, chances are that your enterprise is being taken advantage of by dishonest individuals.

You must cover significant costs for chargeback administrative fees. You will invest unreasonable time arguing the lawsuits by presenting any proof you can accumulate. Nevertheless, it is crucial to bear in mind that the conclusive ruling rests with the magistrate. Furthermore, in case the fees become excessively steep, financial networks such as Visa or MasterCard may place you on a list of high-risk customers. They may prohibit you from managing their card payments.


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