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The Wages Of Sin

By Lea Goldman

PayPal won't touch online gambling, porn and other vices. That's just fine with Neteller.

No buxom cocktail gals distract the 40,000 or so gamblers on PokerStars.com at any given time, where high rollers plunk down an average of $100 to $200 per transaction. So popular is the site that it doubles its player pool every six months. Some of that business slides right into the pocket of a company called Neteller Plc., the largest handler of financial transactions on the site.

PayPal, the Ebay-owned e-payment financier, used to control that rake--until it swore off the business in 2002, citing legal risks. A year later PayPal paid $10 million to settle U.S. Justice Department allegations that it violated provisions of the Patriot Act barring the transmission of funds known to have been derived from a crime. (Federal law effectively bans online gambling sites from operating in the U.S., but it doesn't prevent American gamblers from using them.) With $18.9 billion in online transactions last year, PayPal has also disavowed the sale of material for "mature audiences," which it says poses a high risk of chargebacks, where a customer refutes a charge. Says a spokeswoman, "We decided to focus on more traditional businesses."

And punish the sinners. Last summer PayPal announced that merchant violators of its "acceptable use policy" risked a $500 fine. The company threatened to freeze out little guys like Perry Brass of the Bronx, New York, who used his own site to sell his erotic fiction, and Rod Shelley of Independence, Missouri, who peddled old issues of Playboy.

Crumbs for PayPal, perhaps, but Black Forest cake to an outfit like Neteller, headquartered on the Isle of Man. It claims to handle transactions for roughly 90% of all online gaming sites and compensates for chargebacks by getting as much as 8.9% per transaction versus PayPal's 2.9%. To date the company boasts 1.5 million customers (versus PayPal's 64 million accounts) and enrolls 3,000 new members every day. Last year it netted $33 million on $82.6 million in sales. In the last year its shares, traded on the AIM London Stock Exchange, have tripled to the equivalent of $11.56.

Other piglets are feasting at the trough abandoned by PayPal. GKBill.com of Antigua services at least 11,000 porn sites. Moneybookers of London has already signed up 800,000 customers, including a fair number of online porn outfits. "It's been a huge opportunity for us," says David Roe, Moneybookers' chief operating officer.

Online gambling, now $9.8 billion a year, will grow an average 13% annually through 2010, estimates industry tracker Christiansen Capital Advisors. Neteller is eyeing more conventional businesses, too. Last month the company paid $12.5 million for Quick Access International, a debit-card processor in Macau that handles $50 million of transactions a year in Asia, most non-gambling-related. Taking the moral high ground may yet prove costly to PayPal.

Source: Forbes