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

No doubt Lefebvre’s personal troubles took a psychological toll on him. How things could go so wrong with his marriage and so right with his company was a bit of conundrum. As for the tolls his company collected every day from online gamblers, there were fewer hitches. Neteller, unhooked from PayPal’s teat, still had a few riddles to solve with the money transfer bottleneck, but it was nowhere near like before. As this fledgling, undercapitalized operation from Canada challenged multinational corporate brands in internet commerce, the focus continued to be on developing its own security measures.

Lefebvre says, “When we started out, the one thing Neteller brought to the table — that was valuable for the internet the world over, not just to gaming — was the fresh view of internet money transfer security. Essentially what Neteller developed was kind of a club approach to whose money the club will accept. You join the club, you prove yourself, and once you’ve proved yourself to be someone who’s actually interested in using the financial transactions and not just trying to scam people, then we permit you more latitude.”

Neteller began to move vigorously into EFT territory because it was much more efficient than hooking up its system to credit cards, which bookies hated anyway. The company still put gamblers on an initial credit card limit of $250, but the next trust-building move changed: customers couldn’t use their credit cards again until they connected their bank accounts to Neteller’s bank account via EFT, exactly like paying a mortgage or receiving a paycheck deposit. Transactions would then be conducted on a real-time basis.

Neteller verified accounts by using a method borrowed from PayPal. First the customer had to hook up his bank account to Neteller. Within a day or so of the connection, Neteller would deposit a small amount of money into the customer’s bank account. Within another day, Neteller would withdraw an amount that was smaller than the deposit it had made the day before. Then the customer had to give Neteller the details of the transactions. “Say we deposit seventy-five cents,” says Lefebvre, “and the day after that we withdraw sixty-two cents. The customer just made thirteen cents, but he has to check his bank account to tell us how much we deposited and how much we withdrew. If he comes up with the right numbers, he’s golden and we can go to work. From that point on, people weren’t running up their credit card bills.”

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: