This document discusses implementing a real-time fraud detection system for online banking. It describes the architecture of such a system, which would collect data on transactions and user access in real-time, analyze the data using rules to determine the likelihood of fraud, decide if a transaction is fraudulent, and respond accordingly. A key part of the system is a rules engine that analyzes multiple factors about transactions and user profiles/histories to identify potentially fraudulent activity. Implementing such a system also requires processes for customer education, authentication, profiling high-risk activities, and handling suspicious transactions.

1. Real Time
Transaction Analysis
and Fraudulent
Transaction
Detection for Online
Banking
Alan McSweeney

2. Real Time Transaction Analysis and Fraudulent Transaction
Detection for Online Banking
Page 2
Contents
Online Bank Fraud ..........................................................................................2
Online Bank Fraud ..........................................................................................3
Real Time Fraud Detection Solution Architecture............................................4
Internet Banking Logical Transaction Layers...............................................4
Real-Time Fraud Detection Solution Framework .........................................5
Real-Time Fraud Detection Solution Architecture........................................6
Rules Engine and Decision Making Facility..................................................8
Complex Event Processing/Event Driven Application Architecture and
Approaches to Fraud Analysis..........................................................................9
Implementing a Real-Time Fraud Detection System......................................10
The behaviour characteristics of online banking fraud are:
• Continuous behaviour changes by criminals
• Very high growth rates
• Sophisticated advanced and changing fraud techniques
To effectively detect and stop fraud before it happens, banks will require insight
into user activity in real-time. This will be provided by a real-time online banking
fraud detection and analysis solution.
There are many small software vendors operating in this area and the market is
still quite fragmented. There will be consolidation as vendors merge and are taken
over or go out of business.
There is an emerging technology in the form of Complex Event Processing (CEP)
that is suitable for real-time online banking fraud detection.
As part of the implementation of any real-time online fraud solution, banks will
need to implement new business processes to support any solution. This will be a
key element of any overall solution.
A complete solution will consist of the following components:
• Continuing customer education
• Possible additional two-factor authentication for customers using some form of
key generation tool
• Profiling customer access and maintaining an up-to-date list of fraud sources to
determine if a known source of fraudulent activity
• Implementation of real-time fraud detection and handling system or systems
• Checking transactions in real time
• Handling of suspicious transactions
• Processes to link all these elements together

3. Real Time Transaction Analysis and Fraudulent Transaction
Detection for Online Banking
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Online Bank Fraud
This whitepaper provides an introduction to the end-to-end landscape of online
banking fraud and its detection and handling. Online banking fraud can arise in
a number of ways:
1. By some form of identity theft where the banking authentication details of
legitimate users are stolen and used for criminal and fraudulent purposes
such as phishing and crimeware attacks
2. By some form of security breach that allows criminals access to bank
banking systems
3. By fraudulent activity by bank employees
4. By persons closely associated with legitimate users gaining access to their
authentication details and performing fraud
The common thread in all this is people who are the weakest link in any security
system.
Of these sources of fraud, phishing in all its forms will be the one that gives rise
to most concern. It will be the mechanism by which criminals get access to
account information in order to defraud customers.
Phishing typically employs both a social engineering and a technical approach
(Crimeware) to steal consumers’ personal identity data and financial account
access details.
Crimeware is software that performs illegal actions not requested by a user
running the software that are typically intended to yield financial benefits to
the distributor of the software.
Social-engineering schemes use spoofed e-mails purporting to be from legitimate
sources to lead consumers to counterfeit websites designed to trick recipients
into divulging financial account authentication data.
Essentially, crimeware is divided into two broad categories:
1. Social Engineering – this involves an e-mail with an address or an
attachment that directs the user to the fraudulent site or inflects the user’s
PC with criminal software
2. Security Exploits – these take advantage of flaws in software such as user’s
operating system, browser or elements of the internet infrastructure used to
gain access to the bank’s online banking site.
Unfortunately crimeware is a fact of life in the online world. Crimeware is
distributed in many ways such as:
• Social engineering attacks convincing users to open a malicious email
attachment containing crimeware
• Injection of crimeware into legitimate web sites via content injection
attacks such as cross-site scripting
The numbers of crimeware-
spreading URLs infecting PCs
with password-stealing code rose
93 percent in Q1, 2008 to 6,500
sites, nearly double the previous
high of November, 2007 - and an
increase of 337% percent from the
number detected end of Q1, 2007.
Source: AntiPhishing Working
Group
http://www.antiphishing.org Q1
2008 Phishing Activity Trends
Summary

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Detection for Online Banking
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• Exploiting security vulnerabilities through worms and other attacks on
security flaws in operating systems, browsers, and other commonly installed
software
• Insertion of crimeware into downloadable software that otherwise performs
a desirable function.
Any approach to preventing fraud needs to take account of these mechanisms
and to ensure that the bank does not perform any actions that could be
mistaken and misused in these contexts, such as:
• Sending mails to customers that could then be confused with phishing mails
• Providing users with separate downloadable software to perform functions
such as security checking and PC fingerprint generation
Real Time Fraud Detection Solution Architecture
Internet Banking Logical Transaction Layers
In terms of examining the options for real-time fraudulent transaction analysis
and determining the architectures and solutions available, there are four
relevant logical layers:
These layers are:
Number of Attacks:
Source: AntiPhishing Working
Group
http://www.antiphishing.org Q1
2008 Phishing Activity Trends
Summary
Frequency and Cost of Attack by Type of
Attack
Source: US National Consumer League,
2007

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Detection for Online Banking
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1. User Physical Access and Location – this layer consists of the device being
used by the user to perform the access, its characteristics, its physical
location and other user details such as mobile telephone, mail address.
2. Internet Communication – this refers to the physical internet layer.
3. User Authentication Layer – this layer consists of the authentication
information users must supply and other authentication mechanisms such
as physical tokens that users might use during the authentication process.
4. Front-End Internet Banking Application – this is the suite of applications
that form the Internet accessible layer of the banking systems.
5. Back-End Banking Systems and Data Warehouse and User History – this
consists of the back-end banking systems and the data warehouse storing
user access history.
Real-Time Fraud Detection Solution Framework
Implementing an effective mechanism for preventing Internet fraud will
involve a multi-layer approach with multi-factor authentication and
verification. It is important to understand that incidents will occur. Any system
involving people will at some stage be compromised.
Also, it may not be possible or worthwhile to implement a solution that is 100%
secure. This may involve substantial incremental cost over a solution that is
close to 100% secure that may not be justified.
An integral part of any fraud detection solution is an incident handling system
and associated processes. At a minimum, these should:
• Contain the damage
• Preserve/duplicate of the compromised system's state for further analysis
• Contact the Police and the Bank’s legal department if required
• Restore operations of compromised system, if relevant
• Analyse problem and determine incident cause
• Document incident and recovery details
• Update control agents/implementation details based on analysis
• Update incident response plan, if required
The illusion of 100% security can be dangerous as it can lead to complacent
behaviour and a substitute for sound practices. It can also cause IT users to
behave more recklessly. Note that security compliance endorses an overall
environment including technology and processes and not just a specific
technology.
The elements of an overall solution can include some of all of:

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Detection for Online Banking
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Real-Time Fraud Detection Solution Architecture
A real-time fraudulent transaction analysis and detection system will operate in
parallel to the normal transaction pipeline.
The transaction pipeline will consist of the following steps:
1. User will initiate the transaction using a device such as, but not limited to,
work or home PC
2. The user will use an internet connection to access the bank’s internet
banking system
3. The user will authenticate with the bank’s internet banking system
4. The user will performing banking transactions
5. The data warehouse will be updated with information collected during the
transaction

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Detection for Online Banking
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In parallel, the real-time fraudulent transaction analysis and detection system
will operate. It should not insert itself into the transaction pipeline as this will
delay transaction processing as well as involve higher implementation costs due
to the integration effort. Details of transactions should be taken in real-time at
two key points:
1. User access to gather details on how the user is accessing the system
2. Transaction to gather details on what transactions the user is performing
This real-time information is then compared with user access history and
transaction history details to determine if the transaction is likely to be
fraudulent.
At a high-level, the real-time fraudulent transaction analysis and detection
system will consist of a core Collect-Analyse-Decide-Respond cycle. These
stages will perform the following tasks:
• Collect – information on the transaction will be collected. This will consist of
access information, session information and transaction details. The
collection component will gather information from multiple sources at
multiple stages both through the transaction life cycle and off-line from
other sources such as watchlists of addresses involved in fraud.
• Analyse – the transaction information collected will be analysed both within
itself and also be compared with historical information collected. Based on
the two sets of data, the transaction will be scored with respect to its
probability that it is fraudulent.
• Decide – there will be a decision engine that determines if the transaction is
fraudulent.

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Detection for Online Banking
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• Respond – based on the decision taken a response action will be determined.
This process needs to happen in real-time as transactions are happening. It
needs to be scalable to handle large-volumes of transactions without delaying
overall transaction processing.
The real-time fraudulent transaction analysis and detection system will also
provide additional functions:
• Reporting and Monitoring – the system should provide reporting and
monitoring facilities to report on fraud analysis activities, system
throughput, performance and other areas
• Offline Analysis – this will provide other non-real-time analysis facilities
that allow patterns across multiple transactions to be identified
• Administration – the system can be administered and managed allow
actions such as new rules to be defined and the operation system to be tuned
and modified.
Rules Engine and Decision Making Facility
This is a flexible rules-engine that takes data from multiple sources to identify
transactions as potentially fraudulent:
The classification will be based on multiple factors, such as:
Current Transaction Details
Transaction Amount
Transaction Type
Transaction History Details
Transaction Frequency
Transaction Type Frequency
Users Profiles
Users Ages
Users Locations
Users Jobs
Session Details
IP Address

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Detection for Online Banking
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Account Activity
User Profile
User Age
User Location
User Job
Browser Type
Session History Details
IP Addresses
Browser Types
Previously Known Sources of Fraud
IP Addresses Associated With Fraud
This information will be combined to assess the probability of the transaction
being fraudulent:
• Current Transaction Details – this will provide a profile of the transaction
being performed
• Transaction History Details – this will allow the current transaction to be
compared against previous transactions
• User Profile – this will provide a profile of the user performing the
transaction
• Users Profiles – this will provide a profile of all users against which the
current user’s profile and the profile of the current transaction against the
profile of transactions performed by similar users can be compared
• Session Details – this will provide details on the internet access session
• Session History Details – this will allow the current session details to be
compared against previous sessions to allow changes to be identified
• Previously Known Sources of Fraud – this will allow the current session
details to be compared known access details associated with fraud
Complex Event Processing/Event Driven Application
Architecture and Approaches to Fraud Analysis
There is an emerging technology in the form of Complex Event Processing
(CEP) that is suitable for real-time online banking fraud detection. The topic of
CEP is itself very complex. This section provides some very brief information to
support its inclusion as an option for implementing a real-time fraud analysis
solution.
The high-level architecture of a Complex Event Processing (CEP)/Event Driven
Application (EDA) architecture is:

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The core logical elements of this approach are:
• Continuous Query Engine - Processes high volumes of streaming data
• SQL-based Event Processing Language (EPL) – extends SQL to handle
streaming events
EPL is SQL-based. It provides easier integration to relational data and the data
storage facility. The key extension within EPL is the ability to handle
streaming data provided by WHEN ... THEN statements rather than
conventional IF ... THEN statements.
A CEP application typically comprises of four main component types:
1. Adapters interface directly to the inbound event sources. Adapters
understand the inbound protocol, and are responsible for converting the
event data into a normalised data that can be queried by a processor (i.e.
event processing agent, or processor). Adapters forward the normalised
event data into Streams.
2. Streams are event processing endpoints. Among other things, streams are
responsible for queuing event data until the event processing agent can act
upon it.
3. The event processing agent removes the event data from the stream,
processes it, and may generate new events to an output stream.
4. The Decide step listens to the output stream, The Decide step forward on
the generated events to external event sinks such as a case management
system.
Implementing a Real-Time Fraud Detection System
Any practical approach to real-time anti-fraud will consist of the following
activities:
• Continuing customer education
• Possible additional two-factor authentication for customers using some
form of key generation tool
• Profiling customer access and maintaining an up-to-date list of fraud
sources to determine if a known source of fraudulent activity
• Implementation of real-time fraud detection and handling system or
systems
• Checking transactions in real time
Details on the levels of
spending by US banks on
consumer authentication and
fraud detection in 2006,
classified by the value of their
deposits.
Source: Gartner

11. Real Time Transaction Analysis and Fraudulent Transaction
Detection for Online Banking
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• Handling of suspicious transactions
• Processes to link all these elements together
Each of these will go some way to preventing fraud. Taken together they will
form a comprehensive solution.
In terms of the previous transaction pipeline, the additional steps required will
be:
1. Before completing the transaction, the banking system would invoke a
function to check the status of the transaction within the Decision engine.
2. The checking function will interrogate the Decision engine to get the result
of the transaction check.
3. If the Decision engine has reached a decision about the transaction, this
would be provided to the application status check.
4. If the transaction was determined to be suspicious, it would be written to a
suspend queue where it would be held according to defined rules.
5. If the transaction was determined not to be suspicious, it would be
processed as normal.
6. The incident handling component would be notified.
Planned increase in spending
intentions in 2007 from 2006
by these banks.
Source: Gartner

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Detection for Online Banking
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For more information, please contact:
alan@alanmcsweeney.com