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

One year after its founding, X.com merged with Confinity, which had started in December 1998 as a firm specializing in cryptography, but its more commercial aim was to provide a way to move money between the now-quaint palmtop computers, or PDAs. After the merger, in February 2001, X.com changed its name to PayPal. Less than two years later, in October 2002, eBay bought PayPal for $1.5 billion in stock. Things moved fast in the dot-com universe, and Musk owned 11.7 percent of PayPal’s shares, or $175.5 million.

Glavine believes PayPal was the “real gateway to getting money” for Neteller. Once it hooked up its own customers to PayPal, Neteller became a simple payee on each PayPal account. Glavine says,

You’d sign up to Neteller first. One of the deposit options is to use PayPal, so you’d click on that. Then you realized you’d need to sign up for a PayPal account as well. You’d use your credit card to deposit money into your PayPal account, and then you’d send money to us, and then you could send that money to a merchant. I remember one day walking a customer through that. It probably took forty minutes. The whole time he’s cursing, “This is the stupidest thing I’ve ever seen in my life … okay, what’s next?” It was cool once you got it set up.

“And in those days, PayPal was eating the cost of the credit card discount,” says Lefebvre. “They were using that as a mechanism for gaining market share. So if you put $100 into your PayPal account on your credit card, they would give you $100. They wouldn’t take the two percent. So we were funding people’s Neteller accounts free.”

Neteller became PayPal’s biggest client, and made it a lot of money. Most PayPal users sold bobbleheads or baseball cards or knickknacks for five or ten bucks. Neteller was pumping hundreds of thousands of dollars through its system, and PayPal personnel didn’t really get why. When they started to figure it out, they began treating Neteller like a credit card company would — they held back a percentage of the transactions. When merchants settle up every month, they receive ninety percent of their money from the credit card company. The remaining ten percent is put into a holdback fund for six months, and that money is used to cover fraudulent transactions. “That’s why nobody likes credit cards in the industry,” says Lefebvre. “The risk continues and you don’t get all the cash for a long time.” This is what PayPal did to Neteller.

Then PayPal decided to go one step further and hold back Neteller monies retroactively. With five or six million dollars now pumping through the system, that’s a lot of clawback. The skirmishes went on, but so did the climb to success. Glavine explains:

I set up a computer in the office that would receive emails. It wasn’t automated, so we’d get an email from PayPal saying Joe Smith sent fifty bucks. Then we’d have to update his account manually online. It was slow, so I set up this computer in the office that checked the PayPal email — that’s all it did. Then I changed the normal ping you get when you receive an email to a cash register sound. Every time we got an email from PayPal we’d hear “Cha-ching!” and me and John would go, “Yeah!”

Then I got to know some of the guys at PayPal. I started talking to the head IT guy. I was telling him about our system and he said they were working on a new automated system. I looked into it and then got it for Neteller. So now, when somebody sent money from PayPal, it would automatically update the Neteller account. So that took the cash machine computer out of it.

Then there came a point when Lawrence, Lefebvre, and Natland flew down to Palo Alto to talk to the PayPal IT guys. When they walked into the offices, the PayPal people were saying to each other, “That’s Jeff Natland! That’s Jeff Natland!” They couldn’t believe it — the guy whose account was churning millions of dollars was some eighteen-year-old kid.

The cordiality didn’t last. Lefebvre explains:

We were using PayPal to get money into our Neteller system, doing about $17,000 a week [$884,000 annualized] when PayPal shut down our account the first time. We sent emails and they’d send back those automated emails. We phoned them up and you couldn’t get through to anybody. It was, “Fuck! What are we going to do now?” And then, by some magic, about three days later, PayPal opened our account again.

And then, at about $70,000 a week [$3.6 million annualized], PayPal stopped it again and asked, “What are you guys doing?” We were scrambling. We were fucked. We were really running around. So we explained to them what we were doing. And then, within about two days, they said, “Okay, we don’t have any problem with that,” and they let us do it again.

Lefebvre estimates the company took about a month to reach $17,000 a week and another month to reach $70,000 a week. Neteller’s host still had no qualms — until relations got personal. Lefebvre explains,

Then, between $70,000 and $170,000 [$8.84 million annualized], an interesting thing happened. A guy signed up, Dan something, he was vice president of development, I think, at PayPal. He signed up under the name Jonathan Davis, which also happens to be the name of a rock star. So one of our guys says, “Hey, we got the lead singer for Korn signing up!” But our guy was kind of paranoid so he said, “I don’t fuckin’ believe it. It’s not him.”

So he phoned Dan and started asking questions and got him to admit, “Yeah, you’re right, I’m not that guy.”

“Well, then, who the fuck are ya?”

He said he worked at PayPal, and we knew we had him. “You lying bastard, we should nail you with fraud.” We froze his account for a few days and then, “Okay, if you apologize we’ll open it again.” PayPal began to understand that we had capable security procedures — which they didn’t. We phoned them , right?

Neteller’s security wasn’t always that good — far from it. There was a steep learning curve involved in developing antifraud measures, and Neteller got beat several times along that curve. The cons started early — even those faxed hard copies were an opportunity for the fraudsters. Glavine says, “The thing about money on the internet is somebody’s always trying to rip you off. Always. Guys would change the date on the faxes, right, and send it in again the next day or the day after.”

Edmunds says, “We were dealing with single highest-risk market going. A lot of gamblers are keen to get their money, and a little bit desperate. We got worked on by every scam going — whatever it takes.”

Edmunds and Glavine then say in unison: “Every single possible scam.”

When the team finally got their credit card processor up and running, the scams only got more outlandish. Glavine remembers,

Right around that time, this guy signed up. You could use as many credit cards as you wanted, right? You could use twenty credit cards, which a guy did. And we didn’t think anything of it. We were like, “Oh yeah, I guess it’s perfectly normal for a guy to have twenty credit cards — whatever.” So he accumulated all this money in his account, about $4,000, and then he wanted a withdrawal. He never did anything with the money, just deposited it from credit cards. And so he asked for a wire to be sent to Latvia. And we didn’t think anything of that, either! Well, hey, that’s common for a guy to use all these different credit cards and then ask for a transfer to Latvia. This went on for a few days.

So Johnny went to the bank to send this wire. As he’s at the bank I get all these credit card rejections coming back. I start looking at the account they’re on and every single one is on this one account. I think, Oh man! And I call Johnny. And he has literally just sent the wire. “Johnny, it’s all fraudulent!”