Sequential Pattern Mining Approach for Personalized Fraudulent Transaction Detection in Online Banking

Abstract

Financial institutions face challenges of fraud due to an increased number of online transactions and sophisticated fraud techniques. Although fraud detection systems have been implemented to detect fraudulent transactions in online banking, many systems just use conventional rule-based approaches. Rule-based detection systems have a difficulty in updating and managing their rules and conditions manually. Additionally, generated from the few fraud cases, the rules are general rather than specific to each user. In this paper, we propose a personalized alarm model to detect frauds in online banking transactions using sequence pattern mining on each user’s normal transaction log. We assumed that a personalized fraud detection model is more effective in responding to the rapid increase in online banking users and diversified fraud patterns. Moreover, we focused on the fact that fraudulent transactions are very different from each user’s usual transactions. Our proposed model divides each user’s log into transactions, extracts a set of sequence patterns, and uses it to determine whether a new incoming transaction is fraudulent. The incoming transaction is divided into multiple windows, and if the normal patterns are not found in the consecutive windows, an alarm is sounded. We applied the model to a real-world dataset and showed that our model outperforms the rule-based model and the Markov chain model. Although more experiments on additional datasets are needed, our personalized alarm model can be applied to real-world systems.