An Ex-Executive to Rock Stars and Seaport Village Pushes PINs on the Digital Frontier

With three computers working on a shelf behind him –one PC is tracking stocks while another is transferring a PowerPoint slide presentation to a lap-top — and a bustling business visible outside the glass walls and audible through an open office door, Lee Stein apologizes for the third time in a 90-minute interview for multitasking, computer lingo for doing several things simultaneously. He’s leaving in two days on a working trip to Europe where he’ll speak at Internet conferences in London and Oxford, and there’s much to be done in the meantime.

Such is the life of the 43-year-old, ponytail-sporting former financial advisor to rock ‘n’ roll stars and one-time president and part-owner of Seaport Village who now finds himself on the leading edge of the digital frontier. The publicly traded Internet company Stein heads, First Virtual Holdings Inc. is seeking to parlay its proprietary PIN-number based payment system, and the public’s deep fear of putting credit card numbers info cyberspace. into an online marketing juggernaut.

In a June 30 report, Business Week says consumer wariness of security may be slowing the growth of commerce on the Net. A June 22nd New York Times article hones in on protecting the confidentiality of customers’ transactions, a subject that is the topic of hearings before the Federal Trade Commission. Systems like First Virtuals and the new Secure Electronic Transaction protocol recently released, are designed to assuage that unease. The banks, too, are keenly interested. Consumer liability is limited to $50 in a case of credit card fraud, and often even that amount is waived. Estimates for bank losses due to Internet fraud vary widely, from $100 million to $10 billion.

For Net shoppers with a MasterCard or Visa, the VirtiialPlN is simple to obtain, easy to use, and very secure. After registering on-line, consumers call an automated 800 number to divulge their credit card number. An e-mail, usually within an hour. confirms the deal. In every transaction from then on. the PIN number substitutes for a credit card, with a confirming e-mail securing the purchase. Of course, all of that is dependent on the merchant accepting Virtual PINs.

For retailers, signing up with First Virtual presents intriguing upsell opportunities that are absent from other forms of online payment systems where anonymity is next to godliness.

The territory First Virtual is prospecting is essentially uncharted.

Separating himself from the pack, Stein says Net shoppers don’t necessarily crave being faceless. Rather, he contends they want a secure system that gives them an electronic identity. Such a system would allow a personalized follow-up with Net consumers. For example, people who enjoy African coffees might get c-mails tied to their ordering patterns that offer specials. Or a magazine subscriber could renew with a simple e-mail reply. VirtualPIN buyers can do all of that while retaining the ability to screen unwanted merchant advances.

While First Virtual will become a warehouse of information on its user’s buying habits. Stein pledges to never re-sell that data, “There is a cultural element there that one has to stay very, very aware of,” he says.

Yet the territory First Virtual is prospecting is essentially uncharted. It also is fraught with well-capitalized competitors promoting their own technologies, and the omnipresent fear than one of the behemoths — Microsoft or the major credit card companies — may powerfully unleash a system of their own, one possibly less elegant than First Virtuals but so well supported it marginalizes all the other players.

And although the estimates are staggering $130 billion of business-to-business sales by the year 2000, no one really knows if the public ever will embrace Net commerce as more than a novelty. As company documents clearly state, the shaky few hundred thousand dollars worth of revenues First Virtual and other online payment systems are now generating each quarter hardly cover the seven-figure losses they and their investors are absorbing to stay in the game.

But Stein, who conceived First Virtual while researching a CD project for musician Peter Gabriel, maybe the perfect man for the job. An attorney and CPA by training, he has the rare ability to be comfortable with bankers and fellow lawyers, and the “stars,” who at one time in his life were performers like Rod Stewart and the band Journey, but in today’s business world are likely to be programmers.

Additionally, in an industry loaded with self-described geeks who view the accomplishment of a new technology as the end result, Stein brings a cold-eyed marketing perspective to the task at hand. “The real art form is taking those good ideas and being able to implement upon them,” he says.

The quality of Stein’s board and staff reflects his previously demonstrated ability to bring people together and make things happen.

For the past 30 months, as the company has taken form, Stein has stocked First Virtual with stars in the Internet programming and database systems arenas. Chief Scientist Nathaniel Borenstein authored the MIME protocol used to send attachments. Stein’s personal technical adviser, Marshall Rose, developed key global standards for electronic messaging and network management. Tom Meyer co-authored VRML 2.0, a new three-dimensional standard while Darren New wrote the protocol for sending video over twisted-pair wire. Also on the staff is Carlyn Lowery, a National Science Foundation fellow, and Carolyn Turbyfill, who played a significant role in developing the SunScreen Security System at Sun Microsystems.

Stein’s board is equally impressive, including financial services heavyweights such as GE Capitals John McKinley, First Data Corp.s Scott Loftesness, and First USA Paymentechs Pamela Patsley. The board’s chairman is Tawfiq Khoury, a retired real estate developer who met Stein when the two served on the San Diego Stadium Authority. Khoury was an early and significant investor, putting, he says, his money more on Stein than the technology.

The quality of Stein’s board and staff reflects his previously demonstrated ability to bring people together and make things happen. San Diego first witnessed this in the 1980’s when Stein, as president of the bayside Seaport Village retail center, worked with 14 agencies and private property owners to orchestrate the realignment of major downtown streets.

Later, when serving as a member of the Stadium Authority, he was able one Saturday night. joined by City Manager Jack McGrory on a conference call, to convince the manager of The Eagles rock group to schedule a stop in San Diego. Other acts he helped secure were Pink Floyd, U2, and the Elton John and Billy Joel tours.

“Those are very important events,” McGrory says. “Generally we make about $250,000 in profit to the city with each concert.”

“If anything, time is your greatest enemy here…”

The latest version of First Virtual’s system was launched live in March, in a tri-city feat of minute-by-minute programming that Stein recounts proudly. With version 3.0, First Virtual can handle 10 million users. Now, if the company is to take advantage of that capacity, it must significantly grow its user base, which today numbers about 200,000 buyers and 2,900 sellers in 166 countries.

To push that effort, First Virtual brought in earlier this year a topflight financial marketing man, Keith Kendrick, a former AT&T senior vice president who played a key role in AT&Ts Jacksonville-based credit card operation and before that served as senior vice president of marketing for MasterCard International Inc. Among Kendrick’s tasks will be getting Visa, MasterCard, or other credit card issuers to begin using traditional marketing methods to give their customers VirtualPiN numbers. The importance of this next stage cannot be understated.

“The issue is one of critical mass,” says Craig Sultan, an Underberg Harris analyst who has followed First Virtual since it was a private firm and is nervously anticipating a credit card marketing insert agreement. “We thought the marketing would hit in April.”

Stein is keenly aware of the need to make progress.

“If anything, time is your greatest enemy here,” he says. “There is a lot to do.” The credit card marketing got a boost in late March when First Data agreed to license 350,000 “Buyer” VirtualPlNs while First USA Paymentech signed to purchase 200 “Seller” PINs for its merchants.

First Virtual is tackling its growth with less money in the bank than anticipated from its initial public offering. The IPO was completed in December, netting $16.7 million. “We were in the second week of our roadshow when (Federal Reserve Board Chairman) Alan Greenspan decided to make the comment that the stock market is a speculative bubble,” recounts Stein. “So the original cover (prospectus) had up to 3 million shares and we sold 2 million.”

The primary IPO underwriters were Bear, Stearns & Co. Inc., 290,000 shares; Cowen & Co., 290,000 shares; Lehman Brothers Inc., 290,000 shares; and Unterberg Harris, 290,000 shares. (Shares held from two 1995 transactions by an affiliate of Unterberg converted into 346,772 shares of common following the offering but were not part of the sale.) The remaining 840,000 shares were underwritten by 27 firms.

Stein sees First Virtual’s ability to personalize Web shopping as its biggest strength.

Merchants have two primary ways to sign up with First Virtual. Those with strong credit histories qualify for the “Express Seller Program.” Requiring a $350 non- refundable fee, it allows for transactions to be settled in a similar amount of time as that of traditional credit cards. Newer, smaller enterprises can sign up for the “Pioneer Seller Program.” Registration costs $10. Funds, however, are held by First Virtual for 91 days, to provide protection from charge-back liability.

Merchants pay First Virtual a transaction fee consisting of 2 percent of the purchase price of the product or service plus 29 cents per transaction. It also collects interest income from funds held the 91 days.

In April, First Virtual announced “I Virtual Place,” its own Web shopping mall geared to gifts, gadgets, and electronic tools. The company’s marketing staff in San Diego vows to make the site a place for repeat visits, offering daily new products, and specials available only to Virtual PIN holders.

For the most part. however, First Virtual needs other Internet merchants to come on board. And it must interface with merchandising software on the retailer’s computers.

Andrew Parker is the president of Mercantec Inc., a company that has sold more than 2,700 software licenses that allow merchants to conduct commerce on the Web. Its SoftCart solution supports numerous payment systems, including CyberCash, Online Analysis, lCVerify, and First Virtual.

In Parker’s view, no one payment system today is the clear leader, although ICVerify appears to be garnering favor with banks. Parker says about 85 companies are now handling the electronic movement of credit card transactions the old fashioned way, and he wouldn’t be surprised to see a similar number doing the same on the Internet.

Stein sees First Virtuals’ ability to personalize Web shopping as its biggest strength. He delights in quoting a New Yorker cartoon caption saying “the Internet doesn’t know you are a dog.”

“In a direct marketing environment, if you buy something electronically, how do they ever merchandise to you again?” he asks. “In a physical world, if you call a 1-800 number, by the time you get off the phone, they try to sell you something else. Its called the upsell. When you get the package at your home, there’s a brochure in it for a related item or series of items. Then the phone will usually ring between 6:30 and 8 at night with another offer.

“How does that happen electronically? Well, the answer is it doesn’t. First Virtual has built a system that can make that happen. The only way we can see that happening is by e-mail. The only way to reach you that second time is by e-mail. Basically, with this messaging system, we permit direct marketing to happen in a continuous fashion. The name that is really bubbling to the top of this is installed base marketing. I buy a laptop from Gateway Computer and I only buy one battery because I want to see how long it is going to last. I don’t get around to buying a second battery. But if they sent me an offer for a discounted second battery, odds are I’m going to buy it.”

Stein received his law degree from Villanova University School of Law and his bachelor’s in accounting from Syracuse University. Before coming to San Diego, he ran a financial management practice in Beverly Hills geared to rich folks and celebrities. Clients included musical groups like Men at Work and Little River Band and film stars such as Gene Hackman and Matthew Broderick. His partner at Stein & Stein was his wife, June, a CPA he met while the two were students at Syracuse. The couple lives in a Rancho Santa Fe mansion with their three children. a girl 15, and two boys; ages 10 and 5.

The sexiest follow-up tied to the PINs is the VirtualTAG, a banner-like advertising vehicle for a Web page.

Stein’s original idea for the Net was to send subscribers a joke a day via e-mail. Users would pay a penny for each joke they liked. But Stein couldn’t find a way to collect that penny, and thus was born First Virtual.

Beverly Parenti has known Stein since his days at Seaport Village, where she was the owner of the wildly successful California Dreamin. After both had cut their ties to Seaport, they teamed on an infomercial project that generated sales of $55 million. Her first clue that Stein was onto a new idea came when he told her to get e-mail. “I said, Get what?” Parenti recalls.

She followed his advice, however, and after helping Stein and the other three founders prepare the marketing materials for the new company, she became First Virtuals’ first employee.

“I think he is a genius,” Parenti says. “His ability to propel the business, to be able to take the entire concept from the idea stage to a public company, and to bring us from being a virtual company to one of over 120 employees, really takes a very unique individual. He is really a visionary entrepreneur.”

While VirtualPlNs are the sizzle, the company’s future is not as a payment system provider. Rather, and this is something Stein stresses, the VirtualPIN is essentially the vehicle First Virtual had to have in place in order for everything else to follow.

The sexiest follow-up tied to the PINs is the VirtualTag, a banner-like advertising vehicle for a Web page. Yet, while clicking on today’s banners takes users to a new page, a VirtualTag is its own interactive mini-Web site, so users never leave the page. PIN-carrying consumers can even close the deal and make the purchase, all without leaving that page. Non-pin owning customers can sign up on the spot.

“We also are going into the arena trying to go into the arena, none of this is guaranteed where you use your credit card in stores, and we can send you an electronic receipt on a daily basis,” Stein says. “We are developing the technologies to format that so it can drop into your Microsoft Money or your Intuit financial management program.”

Peter Tippett, president of the National Computer Security Association, says interfacing with such other programs on a consumer’s PC is what could set First Virtual apart from its Net competitors. “These are the kinds of things that will add to productivity,” Tippett says. “They really start to use the power of the computer.”

In addition, thanks to improvements in e-mail, the receipts and invoices First Virtual will send can contain fully-operable VirtualTAGs with offers geared specifically toward the invoiced item. In essence, a mini-Web page complete with the ability to close a sale “now” will be embedded in the e-mail.

“If every one of those receipts has an offer for a related product, basically you have created a statement stuffer equivalent to an electronic offer,” Stein says.” This has the ability to create vast new revenue streams for financial institutions.”

For businesses with a company credit card, each employee could be assigned a VirtualPIN, all tied to that card. All transactions could be c-mailed to an assigned company executive, and would not be approved unless that person provided a confirming reply.

“Probably when this journey is over, I’ll cut it off.”

Finally, Stein sports a smallish ponytail, one that belies his conservative training, but has served him well in this new venture. It started in the early 1990s after he had sold his real estate and wrapped up work on the infomercial project. During this period of relaxation, he visited a hairstylist and noted his thinning hair. “I said, Look at these strands. Lets cut them off and acknowledge reality.'” Well, the woman also cut his wife’s hair and said she would only cut his with her permission.

That night at the dinner table, he told his wife and daughter the story and joked about growing a ponytail. They both started laughing. “So I said, I’ll show you,” he recalls. He did and then came First Virtual, which involved convincing some very bright, but perhaps a tad eccentric, computer people to join his team. The ponytail “was sort of working with some of the technologists, so I kept it,” he says. “Probably when this journey is over, I’ll cut it off.” And when his locks are being lopped, Stein’s mind likely will be on his next business venture: multitasking.