Bill Reynolds - Life Real Loud - John Lefebvre, Neteller and the Revolution in Online Gambling

Throughout Lawrence and Natland’s first run at internet gambling, the trickiest aspect was moving the money. Like most of the industry, they used person-to-person Western Union, bank wires, and other means, but nothing was satisfactory. Lawrence figured if they could solve the bottleneck in the flow of gamblers’ money to and from bookies, if they could keep ahead of the fraudsters trying to break into websites to steal account information, and if they could operate legally in a kind of gray area that the FBI couldn’t touch — a lot of big ifs — that was a business with the potential to make some real money. GambleUSA.com may have been a failure, but it produced the idea for Neteller.

The way the betting system worked before Neteller came along was not elegant. For example, if you wanted to bet on an NFL game being played on Sunday afternoon, you would use Western Union or a bank wire to send your money to a particular bookie the Thursday before. If you were sending a check, it would have to be the week before. More often than not, when you got up on Sunday morning, you would find that your hand-picked bookie’s lines were no longer as good as another bookie’s lines. Too late, though; you were committed.

Or maybe you wanted to use your credit card, but, because fraud from stolen cards was widespread, credit created huge headaches for the bookies in Costa Rica. “Somebody gets a bill,” says Lefebvre. “He goes, ‘Holy fuck! Somebody incurred a gambling debt on my credit card! It wasn’t me.’ So he phones up Visa and Visa says, ‘That’s fine, we’ll just charge it back.’ When they reverse the charges, it’s the guys down there that lose the money.”

The other problem was what happened when you won your wager on that NFL game. Getting your winnings was even more of a pain because the bookie would send you a check drawn on a bank such as Banco Central de Costa Rica, which could take up to six weeks to clear.

After Neteller came along, when you put your money in your Neteller account you didn’t have to choose your bookie until Sunday morning. You could be watching which way the lines were moving with, say, sixteen bookies on the internet and then make the call an hour before kickoff.

It gets better. If you won, the bookie you chose put your money right back into your Neteller account. You got your winnings straight away, and then you were betting on the four o’clock Jets game. No delay.

At the other end, before Neteller, bookies suffered bad debt in the neighborhood of fifteen percent — not a great business model, but they had to put up with it. Lefebvre explains,

You have to understand how bookies work. They don’t make money winning and losing bets. Indeed, they want to wake up Monday morning and not care which way the game went. It’s the concept of laying off bets. If you’re high on this side, you’ve got two choices. One, change the odds, try to even out your book. But that’s dangerous because then you’ve got odds that are all over the map. Guys start realizing the arbitrage opportunities between the various odds and hit you with $30,000 on that side and $30,000 on this side. They make a margin, right?

So what bookies do is lay off bets. They all know each other and get on the phone and say, “I’m high on New York this game, are you high on Detroit?” And the other guy says, “Yeah.” So they switch. The New York bookie covers the Detroit bookie, and the Detroit bookie covers the New York bookie. They lay off bets and they balance the book, and that’s the way they want it on Monday morning. All they get is the vig [vigorish, Yiddish slang from the Russian for “winnings,” or the juice or take], the five percent.

The bookies had to put up with the bad debt. It was a fact of life in a high-risk business. But what if you found a way to take that risk and punt it? Once it was in a position to do so, that’s exactly what Neteller did, and they started to give the good news to bookies. Lefebvre recounts the mantra: “If you get Neteller money, that’s good money. You’ll never be charged back.”

The company decided to absorb the bad debt because it wanted to get into bookies’ good books, but also because most of the time it identified the bad guys and systematically weeded them out. If you signed up for a Neteller account, the company automatically allowed you to use your credit card up to $250. If you wanted the limit increased, and of course you did because you wanted to gamble more, the company said, sure, but first you need to connect your bank account to its bank account. That way, Neteller security people could get hold of your social security number, phone number, and address. And you had to send them a copy of your phone bill, and it had to have the same address as the one you used. Then they phoned you to find out if you answered that phone. If everything was in order, Neteller increased your credit card limit to $1,000.

Neteller, in effect, groomed its accounts on an ongoing basis. Much of the staff was dedicated to monitoring accounts to make sure they were secure. “We selected from the marketplace those people who actually wanted to gamble,” says Lefebvre, “not the people who wanted to scam gambling money.”

What had been an underlying concern about money circulation in the online gaming business became the overt solution for a new electronic wallet company, which by 2000 had rustled up enough financing to make Neteller a go. Lefebvre approached two Calgary men about his latest start-up, and that was enough. They pitched in some funding and gave a bit of advice, but otherwise remained silent partners. Lefebvre never disclosed the sum of the original combined investment, but according to a U.S. probation officer’s August 23, 2011, presentence investigation report, they, meaning Lefebvre and Lawrence, “raised approximately $300,000 from Canadian investors.” (The report may not be the most reliable guide; it is riddled with obvious errors. In the application for admission to AIM, the figure is cited as $200,000.)

Lefebvre says:

I only pitched the idea to two guys, and they both came through. My biggest supporters were Bruce Ramsay and Victor Choy. They’re both guys who are natural and down-to-earth, and completely non-reliant on their achievements for their sense of self-esteem. Victor’s absolutely the most modest rich guy you’ve ever met. He wanted to get into a dot-com biz. This was before the crash. And Bruce wanted to support my bid to become solvent. I had negative net assets at that point. I’d used up my capital, my friends’ capital and my mom’s capital. Neteller was my bid to graduate from fiscal adolescence.

Choy certainly was a good businessman. He began by running clubs in Calgary, such as the Republik. Later on, he branched into restaurants. And indeed he was a humble guy — solid, responsible, a family man. According to Lefebvre:

He’s gone to every one of his clubs, every night, since he started — one three-day holiday here, one four-day holiday there. He drops in, different schedules, mixes it up, nobody knows when he’s coming. He tells his staff, “Don’t tell anybody I own this place. At the most tell them I work here.” Of course everybody knows, but not everybody knows which guy in the room he is. He and Bruce understand. I’ve been fortunate in my life to have run with guys that help me understand that being loaded doesn’t make you any better than the next guy — although you can play that card if you want.

Ramsay succeeded Lefebvre as president of the student union at University of Calgary, in 1979–80. His previous experience in student government — as vice president, services, and then president — came in handy. Upon graduation, he worked for a couple of years in the Edmonton office of Alberta’s then education minister, Jim Horsman. This afforded Ramsay an excellent opportunity to watch the levers of power. Then he was accepted into the Wharton School at the University of Pennsylvania, the Ivy League institution in Philadelphia. After graduating, Ramsay became a corporate businessman, much like Lawrence.