Chatman is a Formalist which means that he focuses on the way a text is structured and narrated. His analysis relies on viewing a text as story and discourse. The world of the story is comprised of the characters, the settings, and the events that occur. Russian formalists call this "fabula." The discourse, or plot, is the way in which the story is told. If the narrator uses flashbacks, asides, tangents, etc., this is his/her stylistic way of presenting the story. Russian formalists would call this "sjuzet." Discourse (sjuzet) is the plot: how the story is presented.
So, in "Araby," the narrator is an older man presenting us with a plot of what occurred to him as a young boy. The younger version of himself is in the world of the story (called "diegesis"). This is Chatman's important distinction. The narrator as an older man presents the plot/discourse to the reader. So, his version (his plot) is literally removed from the way he actually experienced the events when he was younger. The narrator's discourse is different and separate from the world of the story when he was younger.
Chatman says that this distinction between story and discourse is crucial. In some sense, the discourse/plot is a distortion of the story because the narrator is not in that world of the story. And just as the discourse/plot differs from the story, the perspective of the narrator in "Araby" differs from his older self to his younger self. Consider these sentences from "Araby":
Her name sprang to my lips at moments in strange prayers and praises which I myself did not understand. My eyes were often full of tears (I could not tell why) and at times a flood from my heart seemed to pour itself out into my bosom.
The young boy, infatuated with Mangan's sister, genuinely feels these emotions. The older narrator is perhaps mocking his younger self with these descriptions. So, there is a difference between the young boy's perspective and the older man's. Likewise, there is a difference between the plot narration and the world of the story. Perhaps Chatman's critique of "Araby" has to do with maintaining these distinctions. He would argue that Joyce (or the reader) can not mesh the older narrator of the plot with the younger boy in the world of the story. For Chatman, the two must remain separate. This is useful in this analysis, but other critics challenge Chatman's general view on this, saying that there can be a conflation of plot narrator and character in the world of the story.