How explainability is reshaping fraud detection in the financial sector


AI and ML models have become an essential part of the FinTech sector, predicting outcomes and making decisions, especially in fraud.

In a recent post by Flagright, the company explained how companies can ensure explainability in fraud detection models.

As their complexity grows, understanding the ‘why’ behind decisions becomes critical. Explainability in AI and ML refers to the ability to comprehend the decision-making process of a machine learning model. It is about making the internal workings of a ‘black box’ model understandable.

Explainability is vital for transparency, trust, regulatory compliance, and model performance improvement within the FinTech industry. By understanding how a model makes decisions, biases and errors can be identified and corrected.

To enhance explainability, different techniques are used, ranging from simple interpretable models to more complex ones like shapley additive explanations (SHAP), local interpretable model-agnostic explanations (LIME), or counterfactual explanations. The choice depends on the task’s specific requirements and the balance between model performance and explainability.

In the era of digital transactions, explainability in fraud detection models is indispensable. Explainability offers enhanced fraud prevention, improved risk mitigation, increased customer trust, and ensures regulatory compliance. It helps in understanding the ‘why’ behind fraud detection, allowing financial institutions to fine-tune prevention strategies and stay compliant with regulations like the European Union’s general data protection regulation (GDPR).

Global regulators are focusing on responsible usage of AI and ML in functions like fraud detection. Regulations like GDPR and frameworks like the ‘ethics guidelines for trustworthy AI’ by the European Commission emphasise explainability. Even in the United States, regulations like the fair credit reporting act (FCRA) and regulatory bodies like the financial industry regulatory authority (FINRA) stress the importance of explainability. Compliance with these requirements is crucial to maintaining trust and ethical standards in the FinTech industry.

Explainability in fraud detection is a practical necessity. Implementing it involves model choice, post-hoc explanation techniques, feature importance analysis, transparent reporting, and continuous learning. It requires technical knowledge, strategic decision-making, and effective communication, but offers benefits like increased trust and improved model performance.

Explainability is poised to gain prominence in the future of FinTech. Trends include explainability by design, advanced explanation techniques, regulatory evolution, democratization of AI, and enhanced human-AI collaboration. The future lies in transparent, trustworthy, and effective models that not only detect fraud but also explain the reasoning behind it, ensuring ethical and responsible use of AI and ML in the financial sector.

Read the full post here.

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