Identity Theft Personal Finance

How Businesses Use Machine Learning to Combat Fraud

Eric Rosenberg
Written by Eric Rosenberg

Machine learning sounds like something scary out of The Matrix or iRobot, but artificial intelligence and machine learning are already all around us impacting our everyday life, particularly interactions with computers, retail businesses, and our finances. While there may be a small creep factor in how some of this works, overall machine learning is doing a ton to protect our personal finances from fraud.

In our daily lives, machine learning does a lot more than send targeted advertisements your way. It looks at every credit card and debit card transaction, for example, to determine if you actually made the purchase. Through a combination of big data and artificial intelligence, businesses are working to save both you and themselves a lot of money. Read on to learn more about how and how it works.

What is machine learning?

Machine learning is a system where computers can “learn” how to respond to a series of patterns or data inputs. That’s a mouthful, so simply put you can think of it as a computer looking for patterns in giant data sets, and use those patterns to make a decision.

These types of patterns and decisions can reach into all aspects of our lives. The place you most likely see machine learning in action is when shopping online. Computers learn that people who look at a certain set of products on Amazon are likely to buy another list of product, for example, and Amazon uses those trends to advertise products you are more likely to purchase based on those browsing habits.

But while advertising is one of the ways we most visibly run into machine learning, it is happening behind the scenes in our banking and finances as well. Banks analyze virtually every transaction that goes through their systems looking for fraud, and other businesses use similar techniques to find patterns that stand out from the norm on the hunt for fraudulent activity.

How computers can detect fraud

With machine learning, computers are not quite smart enough to look at a data set and make a human decision. Instead, the computers look at the patterns to create a score, and a human sets the threshold on what score a computer deems to be fraud, and which are not likely fraud.

One of the biggest and most popular fraud prevention system in finance is FICO® Falcon® Fraud Manager, from the same company that makes the FICO credit score. Falcon is employed by banks, card issuers, and card technology providers to keep cyber and financial criminals from stealing money from you and your financial institutions.

Falcon and similar systems do this by looking at every transaction you and other people make. If you have multiple credit and debit cards, you can expect Falcon likely knows about all of them, and uses your transactions to build a profile of your regular activity. Each time you use your card, your bank processes the transaction through Falcon or a similar system. Based on the location, transaction amount, and other factors, that transaction gets a risk score. Depending on the score, Falcon will mark it as fraud or let it through as a regular transaction.

About the author

Eric Rosenberg

Eric Rosenberg

Eric Rosenberg is a finance, travel, and technology writer originally from Denver, Colorado living in Ventura, California. When away from the keyboard, Eric he enjoys exploring the world, flying small airplanes, discovering new craft beers, and spending time with his wife and baby girl. You can connect with him at his own finance blog Personal Profitability.

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