One of the ways perpetrators get away with fraud is by tailoring their approach to exploit a company’s specific weaknesses. However, machine learning, a form of artificial intelligence where technology adapts to more effectively detect fraud schemes, can help combat the ‘ingenuity’ of even the cleverest thieves.
Rise of digitization
More and more, businesses rely on digitization to deliver the goods and services their customers want. Unfortunately, digitization also makes it easier both for cybercriminals and stakeholders, such as employees, vendors, and customers, to steal. Preventing fraud in the digital age requires new approaches.
Machine learning is one such approach. Traditional rules-based fraud detection software flags transactions, such as purchase orders of a certain type or over a certain amount, that are suspicious according to static rules. Fraud detection software that includes machine learning, on the other hand, uses large sets of historical data to ‘learn,’ or create algorithms, about the patterns associated with new fraud schemes, enabling it to detect fraud in the future.
Experience improves accuracy
The machine learning process typically follows several steps:
- The software captures historical transaction data (the more data, the better).
- The company reviews the historical data to ensure it presents an accurate picture of transactions.
- The software applies algorithms to analyze the data to identify potentially suspicious items. This process creates the first fraud detection model.
- The software analyzes the same set of data repeatedly and produces new models for the company to review. The company provides feedback on each model to help the software develop more accurate algorithms.
Through this process, the model learns what constitutes fraud, and the number of false positives drops significantly. In the end, the company selects the most accurate fraud detection model to put into production.
Some companies develop machine learning programs to detect fraud from scratch, but many vendors also sell software if you are looking for an out-of-the-box solution. Need help finding fraud detection software or simply have questions about fraud? Contact us.