Leveraging Explainable AI and Reinforcement Learning for Enhanced Transparency in Adaptive Fraud Detection

The rapid evolution of digital financial services has significantly increased the vulnerability of financial systems to fraudulent activities. Traditional machine learning models have offered substantial progress in detecting fraudulent transactions; however, they often lack adaptability and transparency, critical for dynamic financial environments and regulatory compliance. This paper introduces a novel approach that integrates Deep Reinforcement Learning (DRL) with Explainable Artificial Intelligence (XAI) to enhance fraud detection capabilities in cloud-based financial platforms. Our model, tested on the synthetic PaySim mobile money transaction dataset, leverages the adaptive nature of DRL to continuously learn and update its fraud detection strategies based on evolving transaction patterns. Concurrently, the integration of XAI provides clear, interpretable insights into the decision-making process, thus ensuring transparency and building trust. The proposed model demonstrates superior performance with an achieved accuracy of 99.5% and an F1-score of 99.0%, significantly outperforming traditional fraud detection systems. These results not only underscore the efficacy of our model in improving the accuracy of fraud detection but also highlight its capability in offering significant improvements in understanding the underlying reasons for each decision, thereby aiding compliance with financial regulations. The practical implications of this research highlight its potential to provide a robust, scalable, and transparent solution for real-time fraud detection, which is essential for safeguarding the integrity of modern financial systems.