Mellon Bank Corp. plans to buy software that uses an advanced form of artificial intelligence to detect credit card fraud.

The bank has been testing the software, and agreed to buy it late last month. Philip Samson, a vice president at Mellon, said he expects the software to reduce fraud at the bank - which rose 50% in 1991 - by 15% to 20% next year.

The software, from Nestor Inc. of Providence, R.I., is a neural network system, a type of artificial intelligence designed to discern patterns in large amounts of data in a way that simulates the neural connections of the brain.

Learning Process

The software can change the weights it assigns to variables automatically, as if learning from experience.

Few banks have tested or installed neural network systems, which many bankers consider costly and unproven.

But Mr. Samson said neural networks are more accurate than other types of fraud detection systems, because only they can discern patterns that are not linked in a logical fashion.

In tests the system did best identifying "non-receipt" fraud, which occurs when cards are stolen in transit to customers. The software also did well identifying fraud linked to lost or stolen cards, which constitutes more than half of all fraud, Mr. Samson said.

False Positives

The biggest problem with fraud detection systems is that they frequently identify fraud where none has occurred, Mr. Samson said. Depending on how the bank handles that information, it could harm customer relations.

"The bank debated how to deal with positive identifications by the system, and decided to call customers before stopping the transaction," said Mr. Samson.

The software costs over $100,000 to install, but pays for itself within a year, he said.

The software, which runs on an IBM mainframe, is to be installed at Mellon in November. It will receive data from the credit card authorization and billing systems minutes after a transaction has been approved. A set of reports will be passed to the fraud prevention unit throughout the day.

Mail Order Poses Problem

Mr. Samson said the software did less well at identifying mail-order fraud, in which a customer calls a catalogue company with a phony card number. "The major reason is, there are so few transactions associated with any individual account that there is no time to see a change in behavior," he said.

In the test, the software was run at Nestor's location in Providence with about 10 months' worth of credit card account data transferred from Mellon.

Mellon is the second company to buy the software. A French debit card firm, Sligos SA, installed the software last summer.

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