A popular tool for illustrating a risk vs. cost trade-off is a graph of an efficient frontier. Any point on the frontier line represents the risk and the cost of a particular activity or transaction.
For example consider an importer paying an exporter for goods by payment in advance. This transaction is shown on the graph at point A. The cost of funds transfer is low, but the risk (of non shipment, or non-compliant shipment) is high. The importer could reduce his risk by arranging for a bank to do documentary collection, or issue a letter of credit. These alternatives both reduce the importers risk but also cost more than a simple funds
With the advent of online trade finance tools, the costs of some products reduces as competition recognizes the savings available through client data entry, automated straight through processing, and so on; while risk is also reduced by changes such as faster and more secure transactions limiting the opportunity for exchange risk, credit risk and fraud to take place. This systemic change to the economic environment is having the effect of shifting the efficient frontier down and or to the left so that risk vs. cost trade-off positions not previously possible are now the norm. This effect has been documented in other industries before and was put forward as an expectation of the effect of online systems on the financial world as early as the 1970s.
