Predicting Fraud Transactions Using Machine learning

by | Jan 19, 2023 | Coding, Machine Learning


Fraud detection is a common application of machine learning. For predicting fraud transactions using machine learning, we can use several techniques, including supervised learning algorithms such as decision trees, random forests, and logistic regression, as well as unsupervised learning methods such as clustering and anomaly detection.

To predict fraudulent transactions using machine learning, we would need to first acquire a labeled dataset of past transactions, where the labels indicate whether a transaction was fraudulent or not. This dataset would be used to train a model, which can then be applied to new, unseen transactions to predict whether they are likely to be fraudulent or not.

The features used in the model will include information about the transaction itself, such as the payment type, account, amount, location, and time, as well as information about the customer, such as their past transaction history and behavior. It’s important to note that fraud detection is an ongoing process, and the model will require frequent updates and fine-tuning to remain effective as fraud patterns change over time.



The objectives of predicting fraud transactions using machine learning are as follows:

  • Identifying fraudulent transactions as early as possible to minimize financial losses.
  • Creating a robust model that can accurately detect fraud in real time, even as fraud patterns evolve over time.
  • Automating the fraud detection process to reduce the time and resources required to review transactions manually.
  • Reducing the number of false positives (legitimate transactions incorrectly flagged as fraudulent) to minimize customer inconvenience and improve customer satisfaction.
  • Generating actionable insights from the data to help identify patterns and trends in fraudulent activity, which can be used to improve the system’s overall security.
  • Incorporating Explainable AI (XAI) techniques to understand why certain transactions are predicted to be fraudulent and help improve the interpretability and transparency of the model.
  • Continuously monitor and evaluate the model’s performance to ensure that it meets the objectives over time.


The requirements for predicting fraud transactions using Python will include:

  • A labeled dataset of past transactions: This dataset should include information about both fraudulent and non-fraudulent transactions and should be used to train and test the model.
  • Python programming language: Python is a popular choice for machine learning projects, and many libraries and frameworks are available to aid in the development of a fraud detection model.
  • Machine learning libraries: Python libraries such as scikit-learn, TensorFlow, and Keras can be used to train and evaluate machine learning models for fraud detection.
  • Data preprocessing and cleaning tools: The dataset will likely need to be cleaned and preprocessed to remove errors, missing values, and outliers. Python libraries such as pandas and numpy can be used for this purpose.
  • Visualization tools: Python libraries such as Matplotlib and Seaborn can be used to create visualizations of the data to help identify patterns and trends in fraudulent activity.
  • Performance evaluation metrics: To evaluate the performance of the model, metrics such as accuracy, precision, recall, F1 score, and ROC-AUC can be used.
  • Deployment tools: To deploy the model in a production environment, libraries such as Flask or Django can be used to create web-based interfaces or RESTful APIs to interact with the model.
  • Jupyter Notebook or any other python IDE

Source Code

import pandas as pd
import numpy as np
data = pd.read_csv('Fraud.csv')
# Import label encoder
from sklearn import preprocessing

# label_encoder object knows how to understand word labels.
label_encoder = preprocessing.LabelEncoder()

data['type']= label_encoder.fit_transform(data['type'])
X, y = data.loc[:, data.columns != 'isFraud'], data['isFraud']
from sklearn.model_selection import train_test_split
X_train, X_test,y_train,y_test = train_test_split(X,y,test_size=0.40,random_state=42
from sklearn.preprocessing import StandardScaler
sc = StandardScaler()
X_train = sc.fit_transform(X_train)
X_test = sc.transform(X_test)
#Import Gaussian Naive Bayes model
from sklearn.naive_bayes import GaussianNB
from sklearn import metrics #Import scikit-learn metrics module for accuracy calculation
#Create a Gaussian Classifier
gnb = GaussianNB()
#Train the model using the training sets, y_train)
#Predict the response for test dataset
y_pred = gnb.predict(X_test)
print("Accuracy:",metrics.accuracy_score(y_test, y_pred))
from sklearn.linear_model import LogisticRegression
classifier = LogisticRegression(random_state = 0), y_train)
y_pred = classifier.predict(X_test)
print ("Accuracy : ", metrics.accuracy_score(y_test, y_pred))


Predicting Fraud Transactions Using Machine learning

Explanation of the Code

1. Initially, we have loaded all the necessary libraries through which our dataset is loaded, and accordingly, we will make the further model. Secondly, we have checked that if the dataset contains any null values, we need to clean our dataset and then move with further operations.

2. As the dataset does not contain any null values, so we can move ahead with further operations and can select the algorithm to train our dataset.

3. In this code, we have used Naïve Bayes, and Gaussian Classifiers along with logistic regression is used to train our model, and accordingly, we will test it.

4. Through the sklearn module of python, we are importing the pre-processing module so that we can make our raw data suitable for further analysis.


Hence we have successfully built the predicting fraud transactions using machine learning model that predicts the transactions to be fraud or not fraud according to the given features and the given data. This model will act as a helping tool for organizations in the financial services domain.


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