Detecting credit card fraud by genetic algorithm and scatter search

Abstract

In this study we develop a method which improves a credit card fraud detection solution currently being used in a bank. With this solution each transaction is scored and based on these scores the transactions are classified as fraudulent or legitimate. In fraud detection solutions the typical objective is to minimize the wrongly classified number of transactions. However, in reality, wrong classification of each transaction do not have the same effect in that if a card is in the hand of fraudsters its whole available limit is used up. Thus, the misclassification cost should be taken as the available limit of the card. This is what we aim at minimizing in this study. As for the solution method, we suggest a novel combination of the two well known meta-heuristic approaches, namely the genetic algorithms and the scatter search. The method is applied to real data and very successful results are obtained compared to current practice. © 2010 Elsevier Ltd. All rights reserved.