AI Fraud Pushes Banks to Rethink ID Verification

The modern trust economy was built to eliminate ambiguity. Instead, it is producing more of it.

Consider two stories circulating through technology and compliance circles. In the first, biometric age-verification systems reportedly failed to distinguish adults from children who had drawn fake mustaches on their faces. A crude workaround fooled algorithms built for precision.

The second failure ran in the opposite direction. Pope Leo XIV, calling from Rome to update a phone number at his financial institution, was allegedly disconnected by his Chicago-based bank. Standard fraud protocols made it impossible to authenticate him.

Both stories spread fast because they feel true. Together, they expose a deepening paradox at the center of digital commerce and financial services. Systems built to reduce uncertainty have become so rigid, fragmented and automated that they fail both when fraudsters are obviously fake and when legitimate users are obviously real.

Read more: Why Identity Silos Are Failing in the AI Era

Digital Identity Verification Is Becoming a Scale Problem

Verification has traditionally relied on human judgment. A bank manager recognized a client. A cashier evaluated an ID. A customer service representative noticed inconsistencies in a caller’s story. These systems were imperfect, but they operated within environments small enough for humans to remain central to the trust process.

Digital scale changed that. Global platforms now process millions of transactions, logins and account creations every hour. Financial institutions face pressure from regulators to prevent money laundering, sanctions violations, identity theft and synthetic fraud. At the same time, consumers expect instant onboarding and frictionless access.

In response, financial institutions have invested billions into biometric authentication, AI and KYC compliance systems built to verify identity with machine precision.

The trouble is that most verification systems were built for an internet that no longer exists. They emerged when digital identities were relatively stable and human-generated content could be assumed authentic. Today, AI can generate photorealistic faces, clone voices in seconds, simulate liveness in video checks and create synthetic identities from fragments of real data.

The results can be surreal. A child with crude facial augmentation may satisfy an algorithm trained on simple age markers. An elderly customer with unusual speech patterns or inconsistent device behavior gets flagged as suspicious.

As Veriff Chief Technology Officer Hubert Behaghel told PYMNTS in March, today’s identity systems need to answer three questions continuously: “Are you who you say you are? Can you be trusted? And are you still the same person related to the account?”

It is the “continuously” part that matters most. That single word is changing everything firms thought they knew about fraud prevention and detection.

See also: The Cyber Insecurity List: Why Hackers Are Logging in, Not Breaking In

Trust Is Failing in Both Directions

Historically, fraud prevention focused on one risk: letting a fraudulent actor slip past defenses. Now institutions face a second, equally dangerous problem. Legitimate users increasingly cannot prove who they are to the systems meant to protect them. At the same time, bad actors are getting better at spoofing those systems with AI agents and other digital tools.

The result is a kind of signal inflation. Indicators that once carried high trust value are becoming cheap and easy to reproduce.

“If you start to have bots that don’t look like bots and actually do look like humans, they’re typing with human-like cadence, maintaining long live sessions, that’s where the real fraud starts to come in,” Tim Joslyn, chief technology officer at Paymentology, told PYMNTS earlier this spring.

“Fake normal behavior worries me the most,” he added.

In financial services, this dynamic is especially dangerous because trust is the product itself. Banks do not merely hold assets. They mediate confidence in identity, legitimacy and transactional integrity. When customers feel that systems cannot reliably distinguish obvious fraud from obvious authenticity, institutional credibility weakens.

“Identity at Scale: Where KYC/KYB Touchpoints Create (or Contain) Agent Risk,” a collaboration between PYMNTS Intelligence and Trulioo, shows how companies are adapting to that shift. On average, firms now use digital identity checks in 4.4 different workflows, reflecting how deeply verification is embedded in day-to-day operations.