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While the holiday season traditionally provides a key revenue surge for retailers, it's also a prime time for fraud.

"The amount of fraud that we see is mind-boggling," says Kenneth Sayers, director of credit for PC Mall, an $853 million retailer in Torrance, California, that sells hardware, software, and consumer electronics, primarily through mail order and Web sites.

In November, PC Mall stopped $1.1 million worth of fraudulent orders, bringing its yearly total to $10.8 million. Last year, PC Mall stopped $7.3 million in fraudulent orders.

Prime Target

The company's Web site is a prime target for criminals. While Internet orders account for 25 percent of PC Mall's business, they generate 90 percent of fraud attempts, he says.

Internet fraud is a widespread problem for retailers. Based on results of its annual survey of e-commerce crime, security company CyberSource estimates online crooks will make away with $1.6 billion of 2003 U.S. business-to-consumer e-commerce revenue.

However, the potential for fraud is but one caution during what so far looks to be a strong online holiday shopping season. Other issues, such as Web site performance, also are keeping retailers on edge. Still, Forrester Research predicts online sales from Thanksgiving to Christmas will grow by 42 percent over last year to $12.2 billion.

Meanwhile, money lost to fraud threatened to wipe out the operational savings PC Mall achieves with its Web business. "The cost savings we were seeing from having an Internet site where customers can place orders without human intervention--we were losing those savings on the back end to fraud," Sayers says.

Three-Tier System

To combat this, PC Mall has honed over the last two years a three-tier system for catching fraudulent orders. Its first line of defense is a service from CyberSource that screens orders for suspicious entries, such as geographically mismatched customer information--an overseas IP address with a U.S. billing address, for example. The second and third tiers of PC Mall's strategy depend on in-house systems that compare incoming orders with historical fraudulent and legitimate transactions.

The retailer is on track to reduce its losses this year, Sayers says. Last year the company lost a little more than $1 million in fraudulent orders that it didn't catch in time. This year, the company has kept its losses to about $750,000.

"We're definitely seeing huge improvements," Sayers says. He attributes this not only to technology but also to training. "We keep on top of fraud trends and do a lot of staff training," he says.

Up to Snuff

Keeping Web site performance up to snuff is another ongoing battle for retailers.

These days, online shopping sites are straining under the holiday load, according to Keynote Systems. The company's E-Commerce Transaction Performance Index shows major online shopping sites experienced performance problems during the week beginning December 1.

The index--which measures the response time and success rate for executing a typical multistep online retail transaction on 13 of the most active e-commerce sites (such as Amazon.com, Best Buy, Target, and Wal-Mart Stores)--dipped at times during the week to as low as 80 percent success rate, meaning that consumers could complete only eight out of 10 transactions.

AMR Research warns that today's demanding Internet shoppers expect service to be better than or equal to their in-store experience, and overtaxed retail IT operations might not be up to the challenge.

Last year, almost 20 percent of online customers surveyed reported a negative experience with at least one site and said they would not return to that site. Consumer dissatisfaction puts at risk between $4 billion and $5 billion of online retail sales in November and December, according to the research firm.

Opening the Bottleneck

Urban Outfitters found its Web site wasn't up to par, so the Philadelphia retailer invested in caching software from Warp Technology Holdings to speed performance.

"We always knew we had a bottleneck," says David Hayne, a marketing coordinator at Urban Outfitters who is responsible for the retailer's Web site technology. The company's Web application servers have to refer to a back-end product database--which was not designed to handle Web processing--to display pages, Hayne says. The process slowed Web page views considerably.

This spring Urban Outfitters tackled the bottleneck with Warp's SpiderCache software, which caches Web pages that need to refer most often to the retailer's back-end server. So far, Urban Outfitters has seen its Web page display speeds increase by 40 percent and its total page views increase by 58 percent, Hayne says. Page views have jumped dramatically now that it's easier and less frustrating for customers to browse Web content, he says.