Credit Card Fraud Detection Using Hidden Markov Model

Abstract — Due to a rapid advancement in the electronic commerce technology, the use of credit cards has dramatically increased. As Credit card becomes the most popular mode of payment for both online as well as regular purchase cases of fraud associated with it are also raising. In this paper, we model the sequence of operations in credit card transaction processing using a Hidden Markov Model (HMM) and show how it can be used for the detection of frauds. If an Incoming credit card transaction is not accepted by the trained HMM with sufficiently high probability, it is considered to be fraudulent. At the same time, we try to ensure that genuine transactions are not rejected. Index Terms — Hidden Markov Model, credit card, fraud detection, online shopping, e-commerce (HMM). 2.1 Neural Networks