In an other RPD article “Value chain analysis: functions, roles and parties (case study)” it is explained a value chain analyses is about identifying and understanding the functions and roles involved. Unraveling the interaction between the functions and the distribution of these functions over the parties is key to understanding what is crucial to the dynamic balance in a given value chain.

This insight creates a foundation of understanding of how future changes (e.g. competitor entry, business model changes, legal & regulatory change and technological innovation) will push the existing balance into a new dynamic equilibrium or even into a disruption of the value chain.

Models are used to proliferate knowledge

Humans base their understanding of the world around them on a wide variety of notions. Many conceptual notions are learned from others. In passing on these notions simplifying models are often used.

As (value chain) models in general are only simplistic attempts to create representations of reality chances are that not enough understanding is passed on with the model for a proper understanding of the reality under consideration.

Not to many people challenge the models presented to them, they will just absorb and start using them unquestioned and casually. But misconceptions can be pretty harmful.

Example: Banks and the 4 corner model

Presentatie VBIN 18 04 14.001Sometimes models become institutionalized within companies or even within whole industries. The „4 corner model” – explaining the value chain for payments – is an example as such as it is widely used in the payments industry due to it’s compelling simplicity.

It is generally accepted and internalized by many people in the banking and payments industries. This model underlies many, if not all, bank related payment methodologies.

But does it fit reality well enough to be useful? Or, is it disconnected form the reality it is supposedly representing with the effect it becomes harmful in use?

The use of words

In the traditional model of giro payments – which is basically the same model used in cards – there is a lot of attention to the relationships between the payer, in the model called a „debtor”, and the payee, called the „creditor”, with the banks involved in a given transaction.

First of all using the terms „creditor” and „debtor” is misleading. Not all payments are made between creditors and debtors: e.g. if I make a donation to a charity I am not a debtor and the receiver is the beneficiary not the creditor as the charity did not credit me anything.

Even-though it could be argued most payments are between debtors and creditors it still misrepresents reality by having solely a business perspective (B2B or B2C)in mind. The world, luckily, is about much more then business exchanges alone. In our networked world the business perspective used should be changed as well from b2b and B2c to „structured” and „non structured” relationships.

Words are notions to, and casual use of the words used does not help the good cause of unravelling the mechanisms at work. (see also Finding the Right Terminology: a Procession of Echternach;

Graphical illustration

Secondly the model is cumbersome for it does not differentiate between the primary parties (payer and payee) and the facilitating i.e. secondary parties being the banks. Furthermore it puts the banks graphically as the foundation – the pediment – for the others. This graphically overstates the role and relevance of the banks in the transaction between the primary parties in the exchange.

Reality Field Company

As companies look at this model, they will think: “Why is there only a line drawn to my bank? And where are all those other “streams” that I have to manage? And where are all the other parties participating in my transaction chains, parties which are much more important to me in my value chain? If I where to map out my value chain the bank would not even be part of it!”

Presentatie VBIN 18 04 14.002For businesses, the primary relationship is not one with a „debtor” (i.e. unless the payment is long over due), but their relationship with their customers! And each company is part of a network, a value chain. And there will be all sorts of actions to be carried out. All kinds of transfers are made between provider and customer.

NB The red dotted line in the graphics represents the transfer of money. Please notice I am talking about the perspective of companies!

Bankers will say: „This is not correct for there is no money going back and forth between company and its customer”. Technically, the bankers are (still!) correct. To understand this technicality I refer you to other articles at RPD: e.g. on reversing the payments chain; But to dismiss the input from the companies perspective solely to a payments technicality – which is completely lost on these companies in the first place – would be foolish.

Reality distortion field Banks

Presentatie VBIN 18 04 14.003Anyway, if I make the same way a translation of the 4 corner model for how the banks look at them then you will get exactly the opposite picture:

The 4 corner model presumes four parties with relationships in between. Banks are taking the relationship between the actual payer and payee for granted at best or even completely disregard the relationship between the actual payer and payee totally at worst.

Banks are narrowly focused on their own part of the value chain. They subconsciously think payments are the main reason of a money transfer between two parties. But payments are always facilitating something else.

At its core the 4 corner model is the paradigm that banks have in the back of their head. And because everyone implicitly and explicitly uses this model it funnels the way banks perceive their world. The “distorted reality field” of banks is an important aspect to understand payments today and the role of banks in it in the future.

What is included in and what is excluded from the value chain?

Every model is deliberately simplifying and leaving aspects out of it. What if relevant aspects are left out which are crucial for the subject / value chain in consideration?

“The biggest changes are in the relationship and value chain between the primary actors, seen in the blind spot of the banks seen from the 4 corner model.”

The developments affecting our networked world and hence payments today are out of view of the 4 corner model. Using the 4 corer model inevitably lead to a myopic view on what business you are in, what developments are relevant and even about the self image companies have of them selves.

Einstein: “Everything should be made as simple as possible, but not simpler.”