Capability 1.0. Basic Banking Model

Capability 1. 0

The capability being sought from the current version of banking model is very basic. It is only the capability to connect the need of the borrower to borrow a certain amount of capital to the need of the provider to provide capital with an expectation of a return. 

Object Model: The basic objects in our model

7 nouns (distinct objects) that are immediately visible are

(1)         Provider Person

(2)         Borrower Person

(3)         Provided Capital

(4)         Borrowed Capital

(5)         Provider Pool

(6)         Borrower Pool

(7)         Connection

In the above list compound nouns have been used for some of the objects.  The rules that we defined stipulate that in case in our model there are objects with compound nouns and if a part of the compound noun is common amongst two or more objects then a new object must be created.  Applying this rule, the new object model will have the following objects

(1)         Person

(2)         Provider Person

(3)         Borrower Person

(4)         Capital

(5)         Provided Capital

(6)         Borrowed Capital

(7)         Pool

(8)         Provider Pool

(9)         Borrower Pool

(10)     Connection

Conceptual Model versus Logical Model

We have so far elaborated a part of the connection-pipe model.  The second attribute, the connection-type, still needs to be elaborated.  At this time, we could continue to elaborate the model or choose to move, whatever we have described so far, one step closer to a design format that can be more easily digitized.

I think it will provide a better understanding if instead of further elaboration of the conceptual model we move the discussion towards how to digitize the model developed so far.

Digitization means coding some logic.  The logic needs to be represented in some format before it could be coded.   Without the aid of an appropriate model for representing the logic it is quite likely that the code that will be developed may not be complete i.e. it may not cover all possible scenarios.  While we call the previous model (connection-pipe) a conceptual model we will call this class of model as “logical model”

A conceptual model helps us model the real life scenario so that we are able to go beyond the observable behavior and predict behavior that has as yet not occurred. 

A logical model on the other hand ensures that the conceptual model that we have developed is represented in a way that all the interactions conceived in the conceptual model are captured COMPLETELY.

The purpose of a conceptual model is to completely describe the real life BEHAVIOR.  The purpose of the logical model is to ensure that all the interactions possible in the conceptual model are completely described.  

Modelling a bank. Connection Paths

Having decided upon connection-pipe as the conceptual model, let’s start fleshing out the details of this model.  This section elaborates the connection-path attribute of our conceptual-model.

Connection path as the name suggests is the pathway that connects the borrowers and providers (lenders). There are a few possible pathways and I discuss these below.

(1)      Capital providers are directly connected to specific borrow request.  There are 4 subtypes possible

a.    One capital provider funds one borrower requests

b.    One capital provider funds many borrower requests

c.    Many capital providers together fund one borrower request

d.    Many capital providers together fund many borrower requests

This type of connection yields the Peer-to-Peer lending model of banking.

A pictorial depiction of these 4 cases is presented below

Type 1.d is the most generic one and if the system design implements type 1.d then all other are automatically implemented.  The job of the system design then reduces to implementing type 1.d

(2)         There is no direct connection between capital providers and borrowers.  The capital of all borrowers is pooled together and borrowers are distributed money from this pool.

This is the most common form of banking that is practiced.  However, this is the not only form as the subsequent pathways show.

A pictorial representation of this most common pathway is shown below

(3)         Providers and borrowers are connected through a common pool of funds that is distinguishable from all other pools. As in type 1 before there are 4 possible subtypes

a.    One capital provider pool one borrower pool

b.    One capital provider pool many borrower pools

c.    Many capital provider pools together fund one borrower pool

d.    Many capital provider pools together fund many borrower pools

A visual representation of these four pathways is given below.

Type 3 cases are the more generic versions of their corresponding type 1 cases.  In fact if the design of a system caters to type 3 cases then the corresponding type 1 cases are automatically implemented.

Type 3.d is the most generic one and if the system design implements type 3.d then all other type 3 (and type 1) are automatically implemented. 

Not only type 1 cases but also type 2 case is a specific implementation of a type 3 case where there is just one provider pool.  

The job of the system design then reduces to implementing type 3.d

(4)         In the 4^tht pathway the bank acts as intermediate processor to convert money given by producers to “businesses” that borrowers want to invest in. 

This is actually the Islamic banking model where bank is not allowed to lend money to borrowers (or rather not allowed to charge interest to them) but can assume joint risk or charge fees for services provided.

A visual representation of the pathway is given here

This is the most generic version of all the pathways discussed so far.  A design that implements this pathway will be resilient.  It provides for any form of business model that one can foresee into future.

It provides for Peer-to-Peer lending, Islamic banking as well as traditional Retail banking.  It goes beyond all of these and allows for models of banking where providers can choose what form of assets should their capital be deployed towards and allows them to earn returns commensurate to the risks that they are willing to take.