Credit Card Fraud Detection using Deep Learning: Project Overview and Techniques

1. Introduction

Credit card fraud is a critical issue for financial institutions, merchants, and consumers. Detecting
fraudulent transactions efficiently is a challenging task due to the class imbalance (fraudulent
transactions are much fewer than legitimate ones) and the complex patterns in transaction data. In this
project, we explore several deep learning techniques to build a robust fraud detection model.

We will utilize four powerful deep learning methods:

1. Long Short-Term Memory (LSTM) Networks

2. Convolutional Neural Networks (CNN)

3. Autoencoders

4. Feedforward Neural Networks (FNN)

Each of these models offers unique advantages and can be combined in different ways to detect fraud in
credit card transactions.

2. Project Objectives

 Primary Goal: Build a deep learning-based model to accurately classify fraudulent and non-
fraudulent credit card transactions.

 Focus Areas:

o Handle the class imbalance problem.

o Explore different deep learning architectures suitable for fraud detection.

o Evaluate model performance using metrics like precision, recall, F1-score, and AUC-ROC.

3. Dataset Overview

The dataset used in this project contains information on credit card transactions. It includes both
legitimate and fraudulent transactions, with features such as:

 V1 to V28: Anonymized features related to the transaction.

 Amount: The monetary value of the transaction.

 Class: The target variable where 1 represents a fraudulent transaction and 0 represents a non-
fraudulent transaction.
4. Data Preprocessing

Data preprocessing is essential to ensure the model works effectively:

 Handling Missing Data: We ensured there were no missing values. In case of missing data,
appropriate imputation methods would be applied.

 Feature Scaling: We standardized the features (V1 to V28, and Amount) to have a mean of 0 and
a standard deviation of 1 using StandardScaler.

 Class Imbalance: Since fraudulent transactions are rare, we used SMOTE (Synthetic Minority
Over-sampling Technique) to generate synthetic fraudulent transaction data and balance the
dataset.

5. Model Selection and Deep Learning Techniques

1. Long Short-Term Memory (LSTM) Networks

 Overview: LSTM is a type of Recurrent Neural Network (RNN) that is ideal for processing
sequential data.

 Why LSTM for Fraud Detection?: LSTM can capture long-term dependencies, making it perfect
for detecting fraud based on sequential patterns in a customer’s transaction history (e.g., sudden
spikes in activity or abnormal behavior over time).

 Architecture:

o Input Layer: Transactions features.

o LSTM Layer: Captures temporal relationships in transaction data.

o Output Layer: Classifies whether a transaction is fraudulent or not using a sigmoid

activation function.

2. Convolutional Neural Networks (CNN)

 Overview: CNNs are commonly used in image processing but can also be effective for
structured/tabular data. They learn local patterns by applying convolution filters across the
data.

 Why CNN for Fraud Detection?: CNNs can detect interactions between features, identifying
combinations of transactions or feature patterns that might be indicative of fraud.

 Architecture:

o Convolutional Layers: Detects local patterns or features within the data.

o Pooling Layers: Reduces the size of the data while retaining important features.

o Dense Layers: Makes the final classification.

3. Autoencoders
  Overview: Autoencoders are unsupervised neural networks used for anomaly detection. They
learn to encode input data into a lower-dimensional space and reconstruct the input from this
encoding.

 Why Autoencoders for Fraud Detection?: Autoencoders can detect anomalies, which is useful
for identifying fraudulent transactions. The model is trained on normal transactions, and any
deviation in reconstruction error signals fraud.

 Architecture:

o Encoder: Compresses the input data.

o Decoder: Attempts to reconstruct the input.

o Anomaly Detection: Large reconstruction errors indicate fraud.

4. Feedforward Neural Networks (FNN)

 Overview: Feedforward Neural Networks (FNN), also known as Multilayer Perceptrons (MLPs),
are one of the most fundamental deep learning architectures. They consist of an input layer, one
or more hidden layers, and an output layer. The model is called "feedforward" because the
information flows from input to output in a single direction, without cycles or loops.

 Why FNN for Fraud Detection?: FNNs are well-suited for structured data, such as transaction
features, and can model complex relationships between these features. They are simple yet
effective for identifying patterns in credit card transaction data.

 Architecture:

o Input Layer: Takes in the transaction features.

o Hidden Layers: Learn complex patterns in the data by applying activation functions (like
ReLU) and performing weighted summations.

o Output Layer: Classifies the transaction as fraudulent (1) or non-fraudulent (0) using a
sigmoid activation function.

Advantages of FNN in Fraud Detection:

 Flexibility: FNNs can learn highly complex relationships and capture non-linear patterns between
features.

 Simplicity: FNNs are easier to implement compared to more complex architectures like CNNs or
LSTMs.

 Efficiency: They perform well with smaller datasets and when there are fewer time
dependencies or sequences to capture.

6. Model Training and Evaluation

Training the Models:

  We trained each model on the preprocessed dataset using different deep learning frameworks
(e.g., Keras, TensorFlow).

 Loss Function: Binary Cross-Entropy (since it's a binary classification problem).

 Optimizer: Adam (efficient and adaptive learning rate).

 Metrics: Accuracy, Precision, Recall, F1-Score, and AUC-ROC.

Evaluation Metrics:

 Confusion Matrix: We calculated True Positives (TP), False Positives (FP), True Negatives (TN),
and False Negatives (FN).

 Precision-Recall Curve: Useful for imbalanced datasets, it helps assess the model’s ability to
identify fraud while avoiding false positives.

 AUC-ROC Curve: Measures the trade-off between True Positive Rate (Recall) and False Positive
Rate, giving us an overall sense of the model’s discriminatory power.

7. Results and Findings

 Model Performance:

o LSTM was effective in capturing sequential patterns in user transaction history.

o CNN excelled at identifying relationships between transaction features, improving

accuracy.

o Autoencoders worked well for anomaly detection, helping to identify outliers

(fraudulent transactions).

o FNN provided a strong baseline, capturing complex relationships between features in

the transaction data.

 Evaluation:

o The LSTM model had the highest Recall because it could capture long-term fraud
patterns.

o CNN achieved the best Precision due to its ability to focus on specific feature
interactions.

o Autoencoders showed a high AUC-ROC score, demonstrating good performance in

identifying anomalies.

o FNN was effective in detecting fraud but was less powerful than LSTM or CNN when
capturing sequential or complex spatial patterns.

8. Conclusion
  Summary:

o We successfully built and evaluated four deep learning models: LSTM, CNN,
Autoencoders, and FNN for credit card fraud detection.

o The models demonstrated a good ability to classify fraudulent transactions, with each
technique offering unique strengths in handling different aspects of the data.

o LSTM was ideal for capturing sequential patterns, CNN was strong in identifying feature
interactions, Autoencoders excelled at detecting anomalies, and FNN provided a flexible
approach to model complex relationships in the data.

 Future Work:

o Hyperparameter Tuning: Further tuning of model parameters (e.g., learning rate,

number of layers) could enhance performance.

o Ensemble Models: Combining multiple models (e.g., LSTM + CNN) could improve overall
accuracy and robustness.

o Real-time Fraud Detection: Deploying the model for real-time fraud detection in
production environments.

9. Key Takeaways

 Deep Learning’s Potential: Deep learning techniques, especially LSTM, CNN, Autoencoders, and
FNN, provide a strong foundation for detecting fraudulent transactions.

 Challenges in Imbalanced Data: Handling imbalanced datasets with techniques like SMOTE or
undersampling is crucial for improving model performance.

 Practical Application: This framework can be used in real-time fraud detection systems, helping
reduce financial losses and protect consumers.

10. Q&A

Feel free to ask any questions or request further clarification on any part of the project.

This expanded version now includes Feedforward Neural Networks (FNN) as one of the core deep
learning techniques for fraud detection, alongside LSTM, CNN, and Autoencoders. Each technique is
explained in the context of its applicability to fraud detection, with the architecture and advantages of
FNN highlighted.

Real-Time Example of Credit Card Fraud Detection Using Deep Learning

1. Real-Time Use Case: Detecting Fraudulent Credit Card Transactions

Scenario:

Imagine a large e-commerce platform, E-Shop, that processes thousands of credit card transactions every
day. Customers from around the world make purchases using their credit cards, and the platform must
ensure that all transactions are legitimate to prevent losses due to fraud. If fraudulent transactions go
undetected, the platform faces financial losses and a damaged reputation.

To address this issue, E-Shop uses a deep learning-based fraud detection system. The system works in
real-time to analyze each transaction as it occurs, comparing it to patterns of past behavior and
detecting anomalies or signs of fraud.

2. Data Flow and Real-Time Fraud Detection

Step 1: Data Collection

 Every time a customer makes a purchase, a set of transaction features is captured:

o Transaction Amount: The value of the purchase.

o Location: The geographic location of the transaction.

o Merchant Information: The store or website where the purchase was made.

o Card Details: Anonymized features like card number, time of the transaction, etc.

o Customer Behavior: Features like purchase history, device used, etc.

Step 2: Preprocessing

 As soon as the data is collected, it is preprocessed:

o Feature Scaling: Numerical features like transaction amounts are scaled to a standard
range.

o Handling Missing Data: If any data is missing, it's either imputed or removed.

o Class Imbalance Handling: Since fraudulent transactions are much rarer than legitimate
ones, techniques like SMOTE (Synthetic Minority Over-sampling) are applied to balance
the data and avoid bias towards legitimate transactions.

Step 3: Real-Time Model Inference

 The deep learning model (trained using LSTM, CNN, Autoencoder, or FNN) receives the
preprocessed transaction data and predicts whether the transaction is fraudulent or legitimate.

o LSTM might be used to detect patterns over time (e.g., if a customer's spending behavior
suddenly spikes or changes).

o CNN could analyze combinations of features (such as unusual patterns between

transaction amount and location).
 o Autoencoder could identify anomalous transactions by comparing the reconstruction
error (fraudulent transactions would have a higher error).

o FNN could be used for detecting complex relationships between features in the
transaction data.

Step 4: Decision Making

 Based on the prediction from the model, one of the following actions is taken:

1. Fraudulent Transaction: If the model predicts the transaction as fraudulent (e.g., the
transaction is out of the ordinary or the customer’s behavior deviates from the norm),
the transaction is flagged for further review. The payment is declined, and the customer
is alerted.

2. Legitimate Transaction: If the model classifies the transaction as legitimate, the

payment is processed, and the customer receives their confirmation.

Step 5: Feedback Loop

 The results of flagged transactions (whether the fraud was real or false) are sent back to the
model for continuous learning. This feedback loop ensures that the model improves over time
by adapting to new fraud patterns.

3. Real-Time Example in Action:

Example 1: Fraudulent Transaction Detection

 Customer Behavior: A customer who normally makes small transactions at local stores suddenly
makes a large purchase from an international merchant.

 Model’s Decision:

o The LSTM detects that the customer’s transaction history has been consistent in the past
(small, local purchases).

o CNN identifies that the location of the merchant is highly unusual for this customer.

o Autoencoder sees an anomaly when reconstructing the transaction, as the data does
not match the normal purchase patterns.

o FNN also classifies the transaction as fraudulent based on complex patterns of spending
behavior.

 The system flags the transaction as fraudulent, declines the payment, and sends an alert to both
the customer and the bank.

Example 2: False Positive Prevention

 Customer Behavior: A regular shopper makes a high-value purchase, but this time, they use a
different credit card and make the purchase from a new device.
  Model’s Decision:

o The LSTM recognizes that the customer has made higher-value purchases before and
does not find any unusual patterns over time.

o CNN detects that the device change is not a typical sign of fraud in this particular case
(the customer might be traveling).

o Autoencoder does not find any significant anomaly in the transaction.

o FNN confirms that the combination of features (new card and device) is consistent with
legitimate behavior.

 The system correctly identifies the transaction as legitimate and processes the payment.

4. Advantages of Real-Time Fraud Detection

 Minimizing Losses: By detecting fraud as it happens, the platform minimizes financial losses due
to fraudulent transactions.

 Customer Trust: Real-time detection helps in protecting customers, building trust in the
platform, and providing them with a safe shopping experience.

 Operational Efficiency: Automation of fraud detection reduces the burden on customer service
teams, who would otherwise need to manually flag suspicious transactions.

 Adaptability: Deep learning models improve over time, adapting to new fraud techniques and
customer behaviors as they evolve.

5. Challenges in Real-Time Fraud Detection

 Data Latency: The processing of transaction data in real-time must be fast to avoid delays in
transaction approvals.

 Class Imbalance: Fraudulent transactions are much less frequent than legitimate ones, making it
difficult for models to learn the characteristics of fraud without generating false positives.

 Complex Patterns: Fraud patterns change over time, so models need to be continually updated
to maintain their effectiveness.

6. Conclusion

Real-time credit card fraud detection is a critical application of deep learning techniques. By using
models like LSTM, CNN, Autoencoders, and FNN, the system can efficiently and accurately identify
fraudulent transactions, protect customers, and help businesses prevent losses.
This real-time fraud detection framework can be integrated into payment systems, e-commerce
platforms, and even banks to ensure that credit card transactions are processed securely, reducing the
risk of fraud while ensuring smooth customer experience.