July 22 (Reuters) - An unprecedented number of people falsifying identities to claim U.S. jobless benefits during the pandemic sparked a surge in government spending to curtail the fraud, creating a fierce new battle in the identification business. No company may be benefiting more than ID.me, founded in 2010 as a Craigslist for verified military veterans and valued at $1.5 billion in financing this year by funds including Alphabet Inc"s (GOOGL.O) CapitalG. ID.me in a year has gone from vetting unemployment claimants in zero states to 27, to help address what the U.S. government said could amount to $87 billion in improper unemployment benefits payments during the pandemic. Many of those states have exercised "emergency" or "sole-source" exemptions to skip getting competing bids, according to records Reuters reviewed from 11 agencies. read more The fast growth is now attracting scrutiny from an industry-backed watchdog group into whether a national association may have unfairly steered business to ID.me. It also led to delays for some benefits-seekers, according to ID.me"s chief executive and seven former workers who spoke with Reuters.The former ID.me workers said that non-English speakers, the elderly and people of color sometimes waited days for verification because the company lacked multilingual agents. They added that sometimes users struggled with glitchy video conferencing from Pexip Holding ASA (PEXIP.OL), and said some Black applicants were wrongly flagged by the company"s fraud-detection software. Workers had to verify at least 30 people per eight-hour shift and could wait no more than six minutes for users to respond or solve tech issues, said the sources, including former contractors Carlos Moran, Russell Schwartz and Valerie Blankenship.ID.me CEO Blake Hall told Reuters that language support is expanding, and said the company forewarned states about waits and they never extended beyond a day. "This is a crisis situation. There were no good choices," said Hall, a former Army Captain. Hall added that Pexip offers strong security, and that industry-standard "efficiency targets" did not apply to troubleshooting. Pexip did not respond to comment for this story. With at least some issues addressed, investors are bullish that the McLean, Virginia company is joining a long list of internet services emerging from the pandemic as essential tools. Market researcher Juniper expects global annual sales of online identity verification services to reach nearly $16.7 billion in 2025, up 77% from this year. ID.me, which has nearly tripled to over 50 million users since last March, wants to let them enter the same email and password combination to log into tax or Social Security accounts, download mobile keys for hotel rooms, or prove they are a veteran, nurse or teacher to secure e-commerce deals. It envisions "Sign in with ID.me" buttons on apps alongside "Sign in with Apple" and "Facebook Login." "There"s a huge identity opportunity because there"s no national identity system," said Jesse Wedler, a partner at CapitalG. "ID.me has this out-of-the-box solution." SELFIE CHECKS ID.me"s automated verification technology analyzes evidence and records, including comparing users" selfies with pictures they take of their driver"s license or other identification. If that fails, users can show additional documentation on the video chats with ID.me"s "trusted referees." It saves selfies as another dataset to check against later. With COVID-19 closing state offices and boosting identity theft, officials saw value in face checks and video chats. A federal law passed last December also required identity verification for aid. ID.me struck its first deal last June with Florida. About 15% of unemployment claimants have needed video chats, Hall said.Arizona credited ID.me for reducing fraud and ensuring timely benefits delivery. New Jersey described ID.me as "a tremendous asset," and California called it the best of 12 vendors it considered, including Adobe Inc (ADBE.O) and DocuSign Inc (DOCU.O). Rivals, including Relx Plc"s (REL.L) LexisNexis, which itself went from serving 11 states to 21 during the pandemic, say failed selfie checks needlessly delayed payment to millions of jobless people. They contend that most Americans can be verified without photos by just checking against device information, credit histories or property and utilities records. Hall for years has said that approach disadvantages recent immigrants, lower-income families and others with what the industry calls "thin files," forcing them to verify offline. Competitors view his concerns as outdated. But they do not offer video appeals, through which ID.me has verified 1.24 million claimants, Hall said. No state has canceled it. Thomson Reuters Corp (TRI.TO), the parent of Reuters News, offers Pondera software, which spots suspicious patterns among applicants and is being used in seven states including California and Nevada. For a FACTBOX of players in the space, click read more "ENDORSED ID.ME" But lawmakers and taxpayer advocates have begun to scrutinize whether ID.me was the best choice to handle the influx of users. The IT Acquisition Advisory Council said it wrote to officials including the U.S. Department of Labor"s inspector general that the influential National Association of State Workforce Agencies (NASWA) may have interfered with open-competition requirements by recommending ID.me to the exclusion of others. North Carolina said in its sole-source waiver that NASWA "endorsed ID.me," Pennsylvania cited NASWA guidance in its selection process and Washington state received $177,500 from a NASWA affiliate to try ID.me, records show. NASWA and Hall denied any endorsement, saying the group facilitates information sharing about tools but does not preference any. The states did not respond to requests for comment. The inspector general declined to comment. Contracts and payments obtained by Reuters for ID.me services in 16 states collectively are worth at least $29 million. The company says its overall annual recurring revenue is $150 million. "You"ll start to see some oversight hearings for sure: What are the pitfalls we saw during an extreme, high-pressure time and what are the guardrails we need?" California State Assemblywoman Lorena Gonzalez told Reuters.