Credit Card Fraud: Analysis of Feature Extraction Techniques for Ensemble Hidden Markov Model Prediction Approach

Abstract

In the face of escalating credit card fraud due to the surge in e-commerce activities, effectively distinguishing between legitimate and fraudulent transactions has become increasingly challenging. To address this, various machine learning (ML) techniques have been employed to safeguard cardholders and financial institutions. This article explores the use of the Ensemble Hidden Markov Model (EHMM) combined with two distinct feature extraction methods: principal component analysis (PCA) and a proposed statistical feature set termed MRE, comprising Mean, Relative Amplitude, and Entropy. Both the PCA-EHMM and MRE-EHMM approaches were evaluated using a dataset of European cardholders and demonstrated comparable performance in terms of recall (sensitivity), specificity, precision, and F1-score. Notably, the MRE-EHMM method exhibited significantly reduced computational complexity, making it more suitable for real-time credit card fraud detection. Results also demonstrated that the PCA and MRE approaches perform significantly better when integrated with the EHMM in contrast to the conventional HMM approach. In addition, the proposed MRE-EHMM and PCA-EHMM techniques outperform other classic ML models, including random forest (RF), linear regression (LR), decision trees (DT) and K-nearest neighbour (KNN).