Life Real Loud

by Bill Reynolds

  There was one issue with the new security measure—the forty-eight-hour window. A gambler can move money from his bank account to Neteller’s bank account and use it, but it takes up to forty-eight hours for the actual funds to move. Lefebvre explains, “So if we didn’t establish some kind of precautionary measure, you could successfully execute a transfer, use the money to make a bet, go down to the bank and withdraw the money, and we could be beat for it.” Neteller had to keep all new accounts on a two-day clearance clock. Lefebvre continues,

  So now we’ve got people using EFTs because there’s precious little risk there. But there’s a two-day wait. So here’s one of the genius things of the Neteller business model: after we know you well enough, after you’d done two or three EFT transfers and we know you’re serious about what you want to do, we grant you the distinct privilege of using your EFT transfer money immediately—for which we would charge you a nominal service charge of 7.9 percent. So if you deposit $1,000, we would take seventy-nine bucks and you could use $921 immediately. And as things went on, about sixty percent of our transactions were like that. We called that concept InstaCash. We were actually taking a risk on that for those two days, but we found out our risk loss on those two days was low, because someone who’s trying to scam you out of money would have had to go through the process of a $250 credit card, a $300 EFT transfer, a $500 EFT transfer, and two $1,000 EFT transfers to get to where he was in a position to beat you for $1,000. It was a long process and generally people didn’t do it. They would probably just go to some other website that didn’t have as high security and use the old stolen-credit-card-number scam.

  So EFT was secure for us. We didn’t lose any money on it, and we made 7.9 percent on about sixty percent of the money that was deposited. And that 7.9 percent, it was for a loan of two days. If you annualize 7.9 percent at two days, you get 3.95 percent per day times 365. You’re looking at about 1,440 percent per annum.

  You see, when we started we charged the bookie three percent when we transferred the money the first time, and we charged the bookie three percent to transfer it back to you. But after a while we deduced that the wise thing to do was to charge the bookie three percent when you transfer the money to him but allow him to transfer it back to your account for free. This would keep the money in our system rather than encourage the bookie to find other ways to send it back to you.

  Our statistics indicated to us that when you put money in your Neteller account and used it to go gaming, on average that money was transferred 3.1 paying times before the money left the system, by you withdrawing it wherever you stood at that point after 3.1 transfers, if you were a winner, or if you stayed even, or if you lost a little bit. If a sport-bet guy won it from you, then it was out of the system, but our experience was that every dollar you put in was transferred 3.1 times before it left the system. It was a good little business model.

  Lawrence and Lefebvre were quite pleased with their killer moneymaking concoction. They invited Gordon Herman, the former CEO of Harding Hall & Graburne and the most savvy businessman they knew, to examine their books. After poring over the numbers, he marveled, “Man, you guys really got something by the tail.”

  “And we’re going like this to Gord [shrugging, hands up].”

  On the inside, it may have been a license to print money, but Neteller’s customers were grateful. The enormous convenience of the service outweighed the usurious fees, and they rarely squawked. “From the player’s point of view,” says Lefebvre, “if he’s using InstaCash he doesn’t have to commit to a bookie until Sunday morning.”

  Neteller had executed a radical makeover of the industry, bringing efficiency to internet gaming in general and sports betting in particular. The customer reliably got what he wanted: to gamble secure in the knowledge that his money was right where he had deposited it. Of course, paying a 7.9 percent premium goes against prudent business logic, but Neteller’s customers weren’t prudent. They were risk-takers and they wanted to gamble—now. If that happened to cost a bit more, so what?

  Meanwhile, bookies fell for Neteller’s business model. They didn’t care about getting dinged for three percent per transaction every time because it was way better than incurring the bad debt in the pre-Neteller model. In the dark ages, a few months back, some months they were being defrauded for six percent when their profit figure was five percent. There was a lot of turnover.

  Lefebvre says, “The truth is, a lot of those guys were actually gamblers themselves. This made it doubly perilous for an internet bettor. Unless you’re dealing with a long-established professional on a line sports bet site or poker site, you still get a chance of a bookie that you’re betting with losing his shirt on Sunday night and not being able to come clean with you on Monday morning. And you only know the name that the guy gave you as ‘Nick Barlow.’ You don’t really know that his name was Brad Nelson. It’s called a beard.”

  Nick Barlow was real enough. He was one of the bookies Lawrence met originally in Costa Rica. Lefebvre caught up with him, and they did business together. Barlow became concerned for Lefebvre, who tended to carry around a lot of money, and tried to educate him in the art of protecting himself. Barlow carried a gun at all times and advised Lefebvre to do the same. Lefebvre recalls:

  He’s from California or Phoenix, or like a well-dressed college jockstrap from Colorado. He wasn’t really that heavy himself, but he didn’t mind hanging out with heavy guys.

  I was sitting in my office in Costa Rica, explaining to Nick a difficulty, how I stopped paying people with checks. I had a hard time doing my own signature—it kept changing. So I just started going to the bank every two weeks and getting a pocketful of cash, $7,000, and bringing it back across twenty blocks of downtown San José.

  One American dollar is worth about 500 colones, so a rolled-up wad of $7,000 looks like a wheel of Camembert cheese. Lefebvre carried his wheel of fortune in his tan leather knapsack, “sort of a bronze-y looking canvas with a blackness on it. Anybody in the bank could have phoned anybody they wanted and said, ‘Dude, the guy with the yellow knapsack’s carrying.’ Right?”

  “You gotta get one of these,” Barlow advised at the time, pulling out a gun from his underarm holster. He put it on the table.

  Lefebvre continues, “I was sitting on the other side of my desk. It was a snub-nose gun that had a barrel on the front—he could roll the chamber. Then Nick pulled out a bullet about the size of the first knuckle on my little finger—a real, old-fashioned, brass bullet.”

  “I can fix you up with one of these,” Barlow told him.

  “I don’t know, Nick. I’ve never seen one of those up close before.”

  “What kind you want?”

  “Nick, if I pulled one out I’d likely get shot with it. It’s not just about having a gun—”

  “Well, if you ever change your mind.”

  To Barlow, this behavior was normal. In this business, you had to protect yourself.

  “Nick, I’ll let you know.”

  Lefebvre either didn’t worry or didn’t act like he was worried about the shadier aspects of his business. He was a large man and could be intimidating when he wanted to be. That was one thing. The other was a kind of evangelical fervor built into his company to modify and modernize the behavior of people in his industry. Providing transactional security for bookies was crucial.

  Lefebvre says,

  The convenience Neteller brought for the bookie was security for his money. When we were pitching to merchants, as we called them, our pitch was: “A Neteller dollar is a good dollar every time and we guarantee it.” So we were able to walk into a bookie’s office and say, “How’s your bad debt situation?”

  They’d say, “Fuck, it’s terrible.”

  And we’d say, “Say goodbye to bad debt and say hello to Neteller.” At first they were skeptical. Bookies were reluctant about something like Neteller because they conside
red the bettor to be their property. They’d say, “If we sign up with Neteller, that’s the same as introducing the bettors to all the other websites.”

  We’d say, “Oh yeah? And how’s your bad debt ratio doing? Are you finding it worth it to keep all those customers who steal from you? Hee-hee-hee.” They came to see we were right and said, “That’s pretty good—you’re on.”

  The simpatico arrangement emerged over a two-year period. Websites began to push Neteller on bettors, and bettors began to push Neteller to websites. Lefebvre explains, “Merchants would say, ‘We don’t take customers—we only take Neteller.’ We never even had to advertise.”

  • • •

  Lefebvre and his young gang were down in Costa Rica, building Neteller’s customer service relations with bookies and casinos. PayPal was still killing Neteller with market share, hogging eighty-five percent of the traffic. No one thought that was too big a deal so long as Neteller kept growing. The guys running the little upstart weren’t happy about PayPal’s dominance, but what were they supposed to do about it? If they had stuck it out with PayPal, the Neteller brand would either have become a subsidiary or been eradicated. They were stuck with the leftovers, and they could live with that.

  But then things started to shift. The first thing wasn’t a thing, but a guy. New York State Attorney General Eliot Spitzer decided to take a run at online gambling in his jurisdiction. Spitzer’s new millennium modus operandi was not so much Eliot Ness–style shakedown as common-sense persuasion. Respectable banks had been allowing gambling transactions to proceed, and they had collected a lot of money in transfer fees for doing so. Spitzer could let bygones be bygones, but things had to change, so he started to reason with executives. He warned Citibank that he would get an injunction against the company for processing gambling transactions. He told Newsweek he would give Citibank “a black eye,” and did they really want that for a public image? Citibank blinked. It coughed up $100,000. Then it donated $400,000 for the rehabilitation of gambling addicts. Spitzer wrote it on the wall, and Discover, MBNA, and American Express—while they all loved the easy revenue from processing fees—saw the hint and vacated the market.

  If the executives who ran the company being targeted decided to fight the fine, Spitzer unleashed the dogs and a full investigation ensued. Getting charged with money laundering and racketeering—nobody needed that hassle. Spitzer modified corporate behavior and filled government coffers with the proceeds of the allegedly illegal activity. It was one way of battling white-collar crime, and at the time seemed novel.

  Lefebvre says, “Spitzer took a run at PayPal. It ended in a settlement with the State of New York saying, ‘We’ll pay you $2 million and we will no longer transfer for New York IP addresses.’ So PayPal left New York. We had New York all to ourselves. Spitzer didn’t ask us to stop.”

  Thanks to Spitzer, Neteller’s business received a nice bump. While Spitzer was harassing PayPal to stop accepting money transactions involving gambling bets on the internet, PayPal was planning to go public, and the Securities and Exchange Commission (SEC) told the company it had six months to get out of gambling. In other words, the commission let PayPal milk the cash cow for half a year, but then it was game over. And then eBay came along. “Everybody thought the SEC ruling was good enough,” says Lefebvre, “and then eBay began negotiations to take over PayPal and said, ‘We have no interest in the gambling trade, so PayPal: stop it.’”

  When PayPal became a subsidiary of eBay in October 2002, it agreed to wind down any online transactions having to do with gambling, which, in the first half of 2002, amounted to eight percent of its business, or $8.2 million. One year later, eBay paid a $10-million fine for PayPal allegedly transmitting funds to aid offshore gambling in violation of American law between 2000 and 2002.

  Neteller, being the next-biggest brand in that market, picked up the slack. It was an astonishing move that required no movement at all—less Sun Tzu, more Bodhidharma, and it decisively changed the fate of the smaller company. Two armies are on a battlefield, and the one that is ten times larger, looking to annihilate the other, suddenly flees. It was like Spartacus versus the Roman Empire in reverse.

  “There was some jubilation,” Lefebvre recalls, trying to remember the peculiar combination of deep puzzlement and elation in early 2003. “Neteller was: ‘Hey, you mean we don’t even have to fight for it?!’ That’s when the business exploded. There was also a tremendous amount of anxiousness because PayPal went home for a good reason—because they were going to get charged. So, yeah, I’ve got millions, but it was always tempered by that ‘but’ side of it, right? I’ve got the cash but we still weren’t really sure about how much the cash cost us.”

  Lefebvre lets out a mordant laugh. “And we’re still not.”

  He continues, “Our business took off. Huge. It went from good to massive. You know, we thought it was a big deal when we got one million in business, period. And then it was a big deal when we were getting one million a month. We thought that was really a big deal. By 2007 we were tracking for fourteen billion a year—over a billion a month. It was the gift that kept on giving, and we just ran with it.”

  • • •

  Neteller’s e-wallet system was recognized by bookies as superior, and now it had little competition in the money transfer field. With its credibility established, market penetration deepened by the week. Lefebvre explains,

  The only impetus bookies had to go with another provider was price, but when you’re jacking the guy down on price you’re jacking him that much closer to being a failure. There are only two incentives from the bookie side. One is to spread the risk, so if one company does fail you’ve only lost half your money. The other one is to put you in a position so that you can bargain your transfer rate down. Some guys tried and some guys succeeded at it, but they only got, at the biggest, to four percent of our penetration.

  And that’s because we there was really no reason for anyone to go anywhere else—especially to someone who was trying to get market share by offering lower rates, which amounts to getting market share by making yourself more risky.

  These other companies included OnePay and FirePay and later on E-Cashworld and WorldPay. Most of these companies will not offer their services to gamblers in the U.S. because the DOJ has made the market—the world’s largest—inhospitable not only to gambling sites but to e-wallet companies servicing the gambling market.

  With Neteller in such a good financial position, Lawrence began to look at other forms of electronic moneymaking. He looked at the so-called credit card accumulators and wondered if Neteller could beat them at their own game of lending out money to hapless customers who needed cash fast at usurious rates. Companies like FirePay and CCBill made it their business to lend out their relationships with Visa and MasterCard for a hefty fee. Porn sites tended to be its type of customers. The reason the rates were so high—nine percent, ten percent—was the credit card companies charged FirePay rates in the 3.5 to 4 percent range, so it needed to take its own profit. The money was in the transaction fees in this corner of the business as well, almost like a surcharge on so-called vice activities.

  Lefebvre says,

  At one point, we went into competition with all of those accumulators with a business called ProBilling, which did the same thing. We allowed our credit card facility out to the people for an increased rate. And one of the things we decided to do with ProBilling was price-compete on credit card accumulation fees, which were roughly around 9.5 percent in those days. We set it around 7.9 percent.

  So then we started getting calls from CCBill and some other guys, saying, “What the fuck are you guys doing?” We said, “Free country. We’re just competing—got a problem?” They said, “No, you got a problem!” We get up the next morning, and Neteller and ProBilling logos appear on about fifteen kiddie porn sites. How dirty can you get? And we said, “Uh, okay,” and backed away. We don’t know if th
ey really appeared on kiddie sites, but what they sent us was links that sent us pages that looked like kiddie porn sites with Neteller logos all over them. They could have made them up, but we got the point. They weren’t above using the real ones. It was the frontier out there then.

  It didn’t really matter that Lawrence’s schemes to diversify the business, plausible in principle, went nowhere. The real cash cow, Neteller, had udders gushing milk in every direction. Milk the cash cow, ride the pony, the roller coaster is all downhill, baby, so hold on and mix all the metaphors you want. The laws of physics have been breached. What goes up must go up.

  IX (2003–05)

  Let the Good Times Roll … and Roll

  After Lefebvre arrived in Costa Rica, Neteller moved into a different phase of growth, what he calls the “professional era.” Gordon Herman joined Neteller in September 2002, taking the position of chief operating officer (COO). A smart, experienced corporate businessman and a guy they had known for several years, Herman had a reputation for turning around, fixing up, or tuning up companies. He was well educated in business administration, receiving his bachelor’s from Brigham Young University in 1980 and his master’s from the University of Notre Dame in 1984. Herman had been president of General Electric Capital Leasing Inc., a division of General Electric. He had also been chairman of Madison Companies, a Canadian public company, and managing director of Chell.com, an application services provider based in Calgary. And, of course, he had been president of the insurance company Harding Hall & Graburne, which was where he and Lefebvre met in 1995.