AI Fraud & Risk Scoring Systems

Risk scoring is where all verification signals come together into actionable decisions.

Input signals: - Document verification results (authenticity, data extraction) - Biometric matching scores (face match, liveness) - Device intelligence (fingerprint, reputation) - IP and location data - Behavioral signals - Third-party data (watchlists, credit bureaus)

Scoring approaches: - Rules-based: Explicit logic for known fraud patterns - ML models: Learn patterns from historical fraud data - Hybrid: Rules for known patterns + ML for anomaly detection

Output decisions: - Auto-approve: High confidence legitimate user - Auto-reject: Clear fraud indicators - Manual review: Uncertain cases need human judgment

Most production systems use hybrid approaches—rules catch known fraud quickly, ML catches novel patterns.

Raw signals need transformation into features that ML models can use effectively.

Document features: - Document age (new vs established) - Country risk classification - OCR confidence scores - Authenticity check results - Data consistency flags

Biometric features: - Face match confidence score - Liveness score - Number of capture attempts - Image quality metrics

Device/network features: - Device age (new vs known) - Previous verification attempts on device - IP risk score - VPN/proxy flags - Location consistency

Behavioral features: - Time to complete verification - Number of retries - Navigation patterns - Session characteristics

Aggregate features: - Velocity (attempts per time period) - Cross-entity links (shared device, IP, document) - Historical patterns for this user

Training fraud detection models requires careful attention to data quality and evaluation metrics.

Training data challenges: - Class imbalance: Fraud is rare (often <1% of cases) - Labeling: Need confirmed fraud labels, not just suspicious - Feedback delay: Fraud may not be discovered for weeks/months - Concept drift: Fraud patterns change over time

Handling imbalance: - Oversampling fraud cases (SMOTE) - Undersampling legitimate cases - Adjusted class weights - Anomaly detection approaches

Evaluation metrics: - Precision: Of flagged cases, how many are actually fraud? - Recall: Of all fraud, how much do we catch? - False positive rate: Legitimate users incorrectly blocked - Area under ROC curve: Overall discrimination ability

Trade-offs: Higher recall catches more fraud but increases false positives (blocked legitimate users). The right balance depends on: - Cost of fraud vs cost of blocked user - Regulatory requirements - Manual review capacity - Customer experience priorities

Fraud scoring systems must be explainable for compliance and operational effectiveness.

Why explainability matters: - Regulators require ability to explain decisions - Manual reviewers need context for uncertain cases - Customers have right to understand rejections - Model debugging and improvement

Explainability approaches: - Feature importance: Which signals drove the score - Local explanations: Why this specific case scored high/low - Counterfactual: What would need to change for different outcome - Audit trails: Complete record of decision factors

Compliance requirements: - GDPR Article 22: Right to explanation for automated decisions - Fair lending laws: Can't discriminate on protected characteristics - AML requirements: Document basis for customer risk ratings - Audit requirements: Demonstrate decision-making process

Implementation: - Log all input signals for each decision - Store model version and configuration - Generate human-readable explanations - Support appeals and manual overrides

Fraud patterns evolve constantly. Scoring systems must improve continuously.

Feedback loops: - Mark confirmed fraud cases for model retraining - Track false positives from appeals/manual review - Monitor fraud that slipped through (chargebacks, reports) - Analyze manual review decisions for patterns

Model updates: - Regular retraining on recent data - A/B testing model versions - Gradual rollout of new models - Rollback capability for regression

Monitoring: - Score distribution over time (drift detection) - Approval/rejection rates by segment - Manual review volume and outcomes - Fraud rate trends

Key metrics to track: - Auto-approval rate: Higher is better for UX if fraud rate is acceptable - Manual review rate: Lower reduces operational cost - Fraud catch rate: Higher is better for risk management - False positive rate: Lower improves customer experience - Time to decision: Faster improves conversion

Balance these metrics based on business priorities. Continuously optimize the trade-offs.