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Harnessing the Power of Machine Learning in Fraud Prevention

Level of difficultyMedium
Reading time6 min

Picture this: A thriving e-commerce platform faces a constant battle against fake reviews that skew product ratings and mislead customers. In response, the company employs cutting-edge algorithms to detect and prevent fraudulent activities. Solutions like these are crucial in the modern digital landscape, safeguarding businesses from financial losses and ensuring a seamless consumer experience.

The industry has relied on rules-based systems to detect fraud for decades. They remain a vital tool in scenarios where continuous collecting of a training sample is challenging, as retraining methods and metrics can be difficult. However, machine learning outperforms rules-based systems in detecting and identifying attacks when an ongoing training sample is available.

With advancements in machine learning, fraud detection systems have become more efficient, accurate, and adaptable. In this article, I will review several ML methods for preventing fraudulent activities and discuss their weaknesses and advantages.

Methods: Maximizing Effectiveness in Fraud Prevention

Anomaly Detection

Anomaly detection is a powerful method to identify patterns that deviate from the norm. For example, it helps the financial industry to detect fraudulent credit card transactions. The model learns the usual spending habits of users and flags any transactions that contrast the established behavior, such as purchases in a different location.

Supervised Learning

In supervised learning, the model is trained on labeled data, getting insights to predict unseen data. A typical example is email spam classification. The model is trained on a labeled dataset of emails, where each message is marked as spam or not spam, and then it can accurately predict whether new emails are legitimate.

Supervised learning algorithms can also detect deceitful transactions on e-commerce platforms. By learning from labeled historical data, the model predicts the likelihood of fraudulent new actions and takes appropriate measures.

Unsupervised Learning

Unsupervised learning is invaluable when the data may contain hidden or emerging trends. In cybersecurity, unsupervised learning can cluster network traffic data to identify groups of similarities. By analyzing these clusters, we can detect unusual traffic and potential threats.

Unsupervised learning facilitates fraud detection in insurance claims by clustering similar claims and detecting any outliers that exhibit suspicious patterns, indicating potential scam attempts.

Deep Learning

Deep learning excels in tasks that involve unstructured data, such as images, text, and speech. Deep learning models can automatically learn intricate features, making them highly effective in fraud detection.

For example, deep learning can be used in voice biometrics to verify a user's identity. By training a neural network on a dataset of authorized voice samples, the model can verify the user's identity based on their voice, preventing unauthorized access to sensitive information.

Markup: Empowering Machine Learning in Fraud Prevention

Fraud prevention requires complex and costly markup processes, as attackers go to great lengths to evade detection. In lucrative fraud-prone sectors like advertising, scammers invest significant resources, employing tactics like incentivizing people for specific actions, simulating real browsers, and creating sophisticated fake user profiles.

Fear not, for we have solutions to tackle these markup issues. I'll guide you through practical strategies to address this challenge in the following sections.

User-Generated Signals

We can harness a vast network of human intelligence by incorporating user feedback mechanisms, such as the “This is spam” button. When users report suspicious content, they contribute to a dynamic dataset that reflects the latest fraudulent tactics. This continuous stream of feedback helps keep ML models up-to-date.

However, while user-generated signals offer significant benefits, they pose certain risks. Over-reliance on them could expose the system to manipulation and abuse. Malicious actors might attempt to exploit the feedback mechanism to create fake reviews, inflate positive ratings, or generate spam activities to sway markup results in their favor.

To safeguard against potential abuse, you should implement robust verification and monitoring mechanisms. It may involve employing anomaly detection algorithms to identify unusual patterns in user feedback or leveraging reputation scoring systems to evaluate the credibility of user-generated signals.

Analysis of Incidents

Analyzing past incidents is pivotal in identifying emerging threats. By creating a labeled dataset encompassing diverse fraudulent scenarios, we train ML models to recognize and respond to various con attempts in real time. However, the process requires significant human effort to comb through incidents.

In my experience, there are ways to mitigate costs and streamline the process. One method involves student projects where aspiring data scientists can collaborate with organizations to analyze incidents and label data as part of their curriculum. It benefits both parties: companies access expert assistance without incurring substantial expenses, while students gain hands-on experience with real-world datasets.

Another approach is automation. While automated labeling may not be as precise as human labeling, it can still provide a significant volume of labeled data, which is valuable for training ML models.

Random Markup

The randomized markup method represents an innovative approach to enhance fraud detection capabilities. It involves introducing random actions on a small portion of the data stream to gather insights. For instance, showing a captcha to 0.01 percent of users can help identify robotic behavior, as humans pass it while robots avoid it. This generates a valuable signal for markup.

Alternatively, targeting a random audience segment that needs monitoring and providing them with the chance to continue activity can yield valuable markup for future improvements. For example, delivering spam emails to users and observing their reactions can offer insights into spam detection. However, this approach may impact product quality.

Signals from additional data sources

Parsing information from request headers or extracting insights from non-core attributes can provide valuable information. We identify IP addresses, device types, and geolocation data that deviate from normal user behavior by analysing request headers. Inspecting non-core attributes such as user interactions, session duration, or even mouse movement patterns can also unveil subtle anomalies.

Additional information for longer periods may help in retrospective analysis. Let's take the example of a bank issuing loans. By closely observing borrowers' repayment behaviour over time, the bank can uncover patterns that indicate fraudulent clients. Analyzing historical data on loan applicants allows the bank to fine-tune its models and enhance its ability to predict the likelihood of future loan defaults.

Since we want to avoid biases and maintain accuracy and fairness, careful handling of such data is crucial. Understanding the context is vital because non-core attributes might vary among user groups or change over time for valid reasons.


Incorporating crowdsourced markup through platforms like Amazon Mechanical Turk or Toloka can further enhance fraud detection. Leveraging crowd wisdom, we can process a large volume of data quickly. Crowdsourced experts, often called “Turkers” or “Tolokers”, can identify deceptive schemes that may not be immediately apparent to automated algorithms, enriching the data with diverse perspectives and ensuring high-quality markup.

Crowdsourcing can be particularly effective in spam detection. By presenting crowdsourced workers with messages and asking them to identify whether it is spam, we can swiftly obtain accurate labels for a large dataset. 

However, it is essential to recognize the limitations and ethical considerations of crowdsourcing. Crowdsourcing only applies to publicly available messages, such as public forums or social media platforms. Never transferring personal user correspondence or sensitive data to crowdsourcing services is necessary, as this may compromise user privacy and confidentiality.

Clear guidelines and instructions for crowdsourced experts help ensure the markup's quality and avoid potential biases. Providing detailed instructions and examples of fraud scenarios results in a consistent and accurate markup process.


Balancing traditional approaches and machine learning when addressing anti-fraud tasks is crucial. While conventional methods have served as reliable tools for years, the advent of ML significantly presents a transformative opportunity to bolster fraud prevention strategies.

The described methods demonstrate the potential of ML in this area. Anomaly detection, supervised, unsupervised, and deep learning offer distinct advantages in capturing complex fraud tactics, adapting to evolving tactics, and processing vast amounts of data.

However, I do not advocate for a complete shift to pure ML in all cases. Traditional methods still have their merits, especially when dealing with scenarios where continuous data collection or retraining is challenging. 

By combining the strengths of ML in analyzing diverse data sources, recognizing emerging patterns, and adapting to evolving threats with the reliability of traditional methods, you can build comprehensive fraud prevention systems.

Aleksei Toshchakov is a fraud prevention expert with over six years of experience in advertising anti-fraud, spam protection, and developing proprietary captchas. He invented several ML fraud prevention algorithms.

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