Fraud Type Decomposition and the Observation-Mechanism Taxonomy:Class-Specific Detection Limits in Payment Networks
This work addresses the fundamental problem of inefficient fraud detection for financial institutions by revealing the structural incorrectness of current homogeneous fraud models.
This paper demonstrates that treating fraud as a homogeneous binary variable in payment networks leads to inefficiency. By introducing an observation-mechanism taxonomy that partitions fraud into five distinct classes, the authors prove that estimating fraud rates separately for each class and then aggregating them strictly dominates pooled estimation.
Fraud detection in payment networks relies on labels generated through heterogeneous and imperfect observation processes, yet existing approaches treat fraud as a homogeneous binary variable. We show that this assumption is structurally incorrect and leads to provable inefficiency. We introduce an observation-mechanism taxonomy that partitions fraud into five classes, each defined by a distinct censorship and labeling pipeline. We prove that estimating fraud rates separately by class and aggregating strictly dominates pooled estimation, with the efficiency gap characterized as a Jensen penalty arising from heterogeneous observation rates. For each class, we derive the binding theoretical constraint on detection, including endogenous label corruption, structural non-observability, and feature non-informativeness. These results establish that fraud detection is fundamentally a collection of distinct estimation problems, each governed by its own observation structure and detection limit.