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Optimizing Credit Card Fraud Detection: A Financial Approach

This presentation focuses on data analysis methods for credit card fraud detection, emphasizing the financial implications. It covers the evaluation of algorithms, logistic regression, cost-sensitive logistic regression, and financial measures. The study uses a dataset from a European card processing company with 750,000 transactions and 3500 fraud cases. By incorporating cost-sensitive logistic regression and a cost matrix, the approach aims to minimize the financial impact of fraud through algorithm selection based on cost considerations. The presentation emphasizes the need to train algorithms to minimize costs rather than misclassification rates for more effective fraud detection.

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Optimizing Credit Card Fraud Detection: A Financial Approach

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  1. Data Analysis for Credit Card Fraud DetectionAlejandro Correa BahnsenLuxembourg University

  2. Introduction

  3. Introduction

  4. Simplify transaction flow Network Fraud??

  5. Agenda • Introduction • Database • Evaluation of algorithms • Logistic Regression • Financial measure • Cost Sensitive Logistic Regression

  6. Database • Larger European card processing company • 2012 card present transactions • 750,000 Transactions • 3500 Frauds • 0.467% Fraud rate • 148,562 EUR lost due to fraud on test dataset Test Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan Train

  7. Database • Raw attributes • Other attributes: • Age, country of residence, postal code, type of card

  8. Database • Derived attributes • Combination of • following criteria:

  9. Evaluation • Misclassification • Recall • Precision • F-Score • Confusion matrix

  10. Agenda • Introduction • Database • Evaluation of algorithms • Logistic Regression • Financial measure • Cost Sensitive Logistic Regression

  11. Logistic Regression • Model • Cost Function • Cost Matrix

  12. Logistic Regression Under sampling procedure 1% 5% 10% 20% 50% 0.467% Select all the frauds and a random sample of the legitimate transactions.

  13. Logistic Regression Results

  14. Financial evaluation • Motivation • False positives carry a different cost than false negatives • Frauds range from few to thousands of euros (dollars, pounds, etc) • There is a need for a real comparison measure

  15. Financial evaluation • Cost matrix • where: Ca Administrative costs Amt Amount of transaction i • Evaluation measure

  16. Logistic Regression Results Selecting the algorithm by Cost Selecting the algorithm by F1-Score

  17. Logistic Regression • Best model selected using traditional F1-Score does not give the best results in terms of cost • Model selected by cost, is trained using less than 1% of the database, meaning there is a lot of information excluded • The algorithm is trained to minimize the miss-classification (approx.) but then is evaluated based on cost • Why not train the algorithm to minimize the cost instead?

  18. Cost Sensitive Logistic Regression • Cost Matrix • Cost Function • Objective • Find that minimized the cost function (Genetic Algorithms)

  19. Cost sensitive Logistic Regression Results

  20. Cost sensitive Logistic Regression Results

  21. Conclusion • Selecting models based on traditional statistics does not give the best results in terms of cost • Models should be evaluated taking into account real financial costs of the application • Algorithms should be developed to incorporate those financial costs

  22. Thank you!

  23. Contact information Alejandro Correa Bahnsen University of Luxembourg Luxembourg al.bahnsen@gmail.com http://www.linkedin.com/in/albahnsen http://www.slideshare.net/albahnsen

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