As a financial adviser to entertainment celebrities, Lee Stein became accustomed to hitching his wagon to stars.

Now, as chief executive officer of a high-tech start-up company, Mr. Stein is chasing a different kind of rising star in the uncharted reaches of cyberspace.

Turning his entrepreneurial instincts to the Internet, Mr. Stein founded First Virtual Holdings Inc. in October and quickly became one of the pioneers in providing secure payments over that inherently insecure web of on-line computer networks.

The fact that Mr. Stein is what Internet surfers call a newbie - a newcomer - both to the net and to banking epitomizes the emergence of an entire new world of business opportunities that may spawn a corresponding set of payment alternatives.

Like other companies with competing ideas - including Cybercash, Digicash, and Netscape Communications - First Virtual began with the notion that tens of millions of people with access to the Internet's World Wide Web will need a convenient means of paying for the exchanges of services, documents, and other forms of data that are becoming increasingly routine but hard to account for.

In a unique twist, First Virtual relied on the principles of electronic mail and the assistance of two partners well known to bankers - Electronic Data Systems Corp. and the credit card merchant-processing unit of First USA Inc. - to create a working payment mechanism before such an idea occurred to almost anyone else associated with banking.

The company mission is straightforward - "to provide a simple and safe system for facilitating worldwide commerce on the Internet." A brochure describes it in terms any credit card banker can understand, as "merchant banker of the Internet."

It remains to be seen how First Virtual will fare in competition with others that are less grounded in the current workings of electronic mail and credit cards. It has yet to be proved that there is a viable market for the small-value electronic transactions that seem best suited to the Internet and these companies' approach to it.

But Mr. Stein can't be taken lightly. He has a talent for translating creative success into financial rewards: His client list has included recording artists like Peter Gabriel, Rod Stewart, and Kenny Loggins, and actors like Gene Hackman.

The 41-year-old lawyer/accountant cum ponytailed cyberbusinessman says in his new venture he is merely doing more of what he does best, working with and orchestrating world-class talent.

"The First Virtual scientific team is as brilliant as any of the rock stars or movie stars I have represented," Mr. Stein said in a recent interview.

"To be an Internet guru is really an art form," he said, referring to the blue-chip team he brought with him to the San Diego-based company.

His chief scientist, Nathaniel S. Borenstein, "chief visionary" Einar Stefferud, and company principal Marshall T. Rose are all widely recognized and admired for achievements in computer science and Internet circles.

"They're highly skilled at accomplishing a work of art," Mr. Stein said of his team. "Whether it's Kenny Loggins, or Marshall Rose, or Nathaniel Borenstein, when they go sit down at their respective keyboards to compose, some magic comes out the other end that influences the lives of millions of people."

First Virtual is already making an impact on computer users' financial transactions and has thereby begun to have what could be a lasting influence on the banking community. It is doing so by blazing its own trail.

Most of its rivals are trying to overcome the Internet's insecurity through data encryption - the use of complex algorithms to scramble transaction information and prevent its unauthorized interception.

Not ready to put its faith in encryption, and not sure the necessary solutions are near, First Virtual developed a way to handle Internet commerce without encryption, yet without sending sensitive data "in the clear."

While buyers and sellers make contact in the easy, open format that made the Internet as big as it is, First Virtual completes transactions via electronic mail. Credit card data travel over private channels not as easily hacked.

"If people aren't willing to put their credit card numbers on the Internet and the banking industry does not enable a way to do commerce that they feel comfortable with, then commerce on the Internet will go the way of the CB radio," Mr. Stein said.

Indeed, he points to security fears as the primary deterrent to a veritable explosion of on-line commerce.

"As a channel of distribution and a channel of marketing, (the Internet) is here to stay," he added. "And e-mail will be the predominant method of communication, as much as the phone or fax."

Though the idea of a parallel electronic payment system might strike fear in bankers' hearts, First Virtual has reached out in friendship.

As transaction processor, it acts as a credit card "sub-acquirer" to First USA Merchant Services Inc., and Mr. Stein said he is in talks with an unspecified number of other banks with which it would like to forge similar deals. First Virtual and First USA are also working toward a co-branded credit card offering.

Pamela Patsley, president and chief executive of First USA Merchant Services in Dallas, said she was impressed with Mr. Stein and his company's "extremely innovative, very uncomplicated ideas. ... They weren't taking another me-too approach to selling on the Internet."

Mr. Stein said he is looking to hire more banking-knowledgeable executives to develop needed insight into the financial industry.

Whether due to salesmanship or star quality - both of which are present in ample quantity - the formation of what Mr. Stein calls "the finest messaging team in the world" has the sound of legend.

Mr. Stein and Mr. Stefferud met in an airport lounge in early 1994. The media mogul approached the global messaging expert as he was reading his electronic mail on a laptop computer. The technology piqued Mr. Stein's curiosity, and the two hit it off so well that they arranged to sit next to each other on their flight.

The rest, as they say, is history, even if the founders' early route was somewhat roundabout.

The company began with the idea of selling jokes over the Internet. On- line services users could boot up their computers every day to find a new joke, which, if liked, would cost them a penny. If everyone on the Internet bought the joke, the executives surmised, the company could clear as much as $300,000 a day.

The obvious obstacle, Mr. Stein pointed out, was the lack of a billing system on the Internet to allow such sales to take place. This was the mother of First Virtual's invention.

So far, the company has dealt solely with intangible, informational goods like software or photographs that buyers can download.

Ms. Patsley of First USA praised First Virtual's "very specific and focused" slant of dealing initially with this type of on-line commerce, applying very basic tools to serve a ready market. Although she would not disclose transaction volume or revenue, she said the services were seeing "strong, steady growth."

In the next phase of First Virtual's operation, beginning in three to four months, Mr. Stein said he expects to be selling hard goods as well.

First Virtual now caters to an on-line stable of nearly 500 merchants, fewer than 100 of which set up their "storefronts" using a First Virtual facility called Infohaus. The merchants range from "college students with no credit" to Apple Computer Inc., according to Mr. Stein.

Aside from addressing the security issue with the e-mail approach, Mr. Stein said First Virtual's system benefits banks by shifting the risk of collections back to the merchant. The merchants, he said, are content with this prospect because, in contrast to traditional hard-goods retailing, they are offering products from a virtually unlimited stock of informational products.

Mr. Borenstein recently described the company's ultimate goal in terms of an entirely new frontier: "to be leaders in intellectual property commerce."

First Virtual charges buyers $2 and merchants $10 to register to use the service. Merchants also pay a 29 cent processing fee plus 2% of the purchase amount on each sale, which includes the Visa or MasterCard discount, and there is a $1 settlement deposit fee.

The average purchase is about $19, Mr. Stein said. First Virtual is increasing its number of buyers by 16% a week, and 12% of all buyers are also merchants, he added.

A transaction works like this: A consumer requests an item from a seller via electronic message. EDS transfers the account information from the purchaser to the merchant over its own private network. After the order goes through, First Virtual steps in, sending the buyer a message to confirm that he still wants to make the purchase. At that point the payment goes through, unless the purchaser opts to negate the transaction.

The system is not without flaws.

First Virtual credits the accounts of its merchants through the automated clearing house network. But this system does not reach foreign banks, and Mr. Stein said about 20% of First Virtual's customers and merchants are abroad.

And Mr. Stein is well aware that, much like the topsy-turvy world of entertainment, the on-line services landscape could go through several more permutations before standards bring a greater sense of order.

First Virtual's "off-line" approach to commerce met with quick acceptance, but Mr. Stein admits that "what we will be in 10 years is very different from what we are today."

It's hard even to pinpoint exactly where First Virtual is today.

The company is truly virtual. There is no physical headquarters. The executives operate out of their respective homes across the country, communicating entirely by telephone and computer. Mr. Borenstein is based in New Jersey and Mr. Rose in Michigan, while Mr. Stein lives and works out of San Diego.

The new business is real enough to have recently forced Mr. Stein to end his four-year tenure as chairman of the San Diego Stadium Authority, where his entertainment industry ties helped attract performers for concerts. He also has given up most of his advisory work, remaining only as a co- personal manager for Kenny Loggins just to "keep my ear to the ground on entertainment trends."

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