Explainable Ai-Based Fraud Detection in Fintech Applications

Abstract

The rapid growth of digital financial services has significantly increased the volume of online transactions, making fraud detection a critical challenge for financial institutions. Traditional machine learning models often provide strong predictive performance but lack interpretability, limiting trust and practical adoption in financial decision-making. This study proposes an Explainable Artificial Intelligence (XAI)-based fraud detection framework for FinTech transactions using the Kaggle Credit Card Fraud Detection dataset containing 284,807 transactions, including 492 fraudulent cases. To address severe class imbalance, Synthetic Minority Oversampling Technique (SMOTE) was applied, increasing the dataset to 568,630 balanced instances. Data preprocessing involved feature scaling and train–test splitting prior to model training. Three machine learning algorithms—Logistic Regression, Random Forest, and Extreme Gradient Boosting (XGBoost) were developed and evaluated using accuracy, precision, recall, F1-score, and ROC-AUC metrics.
The experimental results demonstrate strong predictive performance across all models. Logistic Regression achieved 94.50% accuracy, 97.32% precision, 91.51% recall, 94.33% F1-score, and a ROC-AUC of 94.50%. Random Forest produced the highest overall performance with 99.99% accuracy, 99.98% precision, 100.00% recall, 99.99% F1-score, and 99.99% ROC-AUC. XGBoost also achieved excellent results with 99.97% accuracy, 99.94% precision, 100.00% recall, 99.97% F1-score, and 99.97% ROC-AUC. To improve model transparency, SHapley Additive exPlanations (SHAP) and Local Interpretable Model-Agnostic Explanations (LIME) were integrated with the XGBoost model to provide both global and local interpretability. SHAP analysis identified transaction amount and several transformed principal component features as the most influential predictors of fraudulent behavior, while LIME provided instance-level explanations for individual fraud predictions. Feature importance analysis from Random Forest and XGBoost further validated the consistency of the most influential variables.
The findings demonstrate that combining high-performing machine learning models with explainable AI techniques can significantly enhance fraud detection accuracy while maintaining transparency and interpretability. The proposed framework offers a reliable and practical approach for intelligent fraud prevention in financial technology systems and supports trustworthy decision-making in real-world financial environments.