Executive Q&A: Katabat CEO Shares Charge-Off Predictions and Thoughts About the Future

In this episode, Stephanie Eidelman, insideARM President & CEO, interviews Ray Peloso, CEO of Katabat, about what he thinks will happen with charge-offs, and what he believes will be essential to success in the future. Watch Stephanie's conversation with Ray, or read it below.

Stephanie Eidelman:

Hi, I'm here today with Ray Peloso. He's the CEO of Katabat. Ray is one of my favorite people in the industry in part because I LinkedIn-stalked him about six or seven years ago. He didn't know me and he was kind and generous enough to respond to me and so began a great friendship. Ray is also a great thinker. So I'm sure this is going to be a very interesting discussion.

Ray Peloso:

Great. Thanks, Stephanie. As always, it's a pleasure to spend a few minutes with you chatting about industry topics. So thanks for inviting me.

Stephanie Eidelman:

Briefly tell us about your company, who are your customers, and what pain points do you address?

Ray Peloso:

We're Katabat. We sell a suite of best-in-breed debt collection systems to clients in North America, the greater APAC region, and Europe. In a nutshell, we help our clients collect more dollars and reduce charge-offs by helping them deploy collection strategies, omnichannel strategies and synchronize and orchestrate offers across the entire collection spectrum. Key pain points we normally address -- certainly, in the last few years, the ability to execute digital omnichannel collections has been a really hot area for us. Secondly, for some of our larger clients, we're a full enterprise-class collection system. So we've got some pretty robust deployments with some larger well-known financial institutions. And then the third pain point, I think that's common across all of our clients, is that we're really an auditable infrastructure. So it's obviously a highly regulated industry. So the controls and the ability to manage audits and compliance is a part of our value proposition.

Stephanie Eidelman:

All right, let's get into this. The current economic conditions have certainly been changing. Are they what you would have expected them to be six months ago? Or if not, how did things unfold differently?

Ray Peloso:

We could spend hours on that one. I don't believe anybody could have predicted where we are. I think we're in amazing uncharted territory. I'll offer four statistics. One is that savings rates, from a generational perspective, are through the roof positive. Who would have predicted that six, nine months ago? Second, delinquency's way down. I was taking a look at some longer-term trends. The 2012-2020 period was a generational low as you and I know having been in this industry, and we're now at half that -- because, number three, the US government printed $4 trillion of cash and threw it into the economy. So you have all these crazy dynamics going on. And then, fourth, just with first-quarter earnings, all the banks threw loan loss reserves way up this time last year, and then took them way down this year. So if I told you I saw this coming I be probably making it up a little bit.

Stephanie Eidelman:

Seeing that through, we know that charge-offs were way down in Q4 of last year, so we've got lower delinquency rates so far this year. What should companies be doing now, during this relatively stable time, to prepare for what you might call the inevitable debt boom? Or, what I would even ask you -- Is a debt boom actually inevitable in the coming quarters?

Ray Peloso:

Yeah. Great question. I think in analogies too often. I feel like we're in calm waters in a boat and it feels pretty good, but then we look down and we actually don't even have a steering wheel or a compass. So we think we're okay, but we're not actually sure where we're going or how we're going to get there. It is a strange analogy, but, you know, the industry has relied upon decades of vintage data and historical data to drive good decision-making. And I think that's all thrown out. Honestly, I think we're in a 12-month period right now where everybody should be uncomfortable. So yeah, I think that boom is coming. Do I know exactly when? No, I think about this as everybody should be planning for uncertainty right now, which is a little bit of a broad statement, but it's true.

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So if you're calm right now, I don't think you shouldn't be, I think you should be actually quite anxious. For example, as I'm sure you know, inflation is starting to pick up, the stimulus programs are going to come to an end. There's been these artificial distortions and consumer behavior. I wouldn't bet that those are long-term enduring patterns. I think things could really pivot relatively quickly. That's the first point. The second point I would make is, forgetting all that, the consumer revolution continues. Like my daughter is 17 and Tik Tok didn't exist three years ago. And her whole generation sees the world through Tik Tok. And so if you're not forward-thinking, if you're not anticipating a 12-month cycle or even a six-month cycle, I think it's actually quite dangerous.

Stephanie Eidelman:

That's a great point. I have also a teenage daughter who is also on Tik Tok and what they use social media for is not something you and I would have imagined. So as it relates to innovation and thinking about communicating with consumers, gosh, it's so hard to imagine the regulations even keeping up with things like Tik Tok. How are you innovating and what are you doing to anticipate things like that?

Ray Peloso:

Yeah. So I'll talk about innovation in a second, but back to the comments that came out when we spoke earlier about sales cycle and velocity. It's amazing to me, the speed of decision-making that I think is the burden on all of us in the industry now. If you wait three or four quarters, because you think you can defer some of these decisions, you can miss the cycle. Anyway, that's to the Tik Tok point, it's just fascinating to me the cycle of change that occurred, and we just sort of operated through it.

In that vein though, we've got a couple of areas of innovation that we're pretty excited about. As you know, we announced the acquisition of Simplicity Collections a few months ago. And so we're rapidly building some integrated products that we expect to roll out, and we see a real need in the third-party market for combined system of record and omnichannel capability.

That's certainly the feedback we received, which led us to want to partner with Simplicity. So we're in the process of generating some products for rollout later part of this year. Secondly, it's a buzzword, RPA, or robotic process automation, but essentially it's using technology to automate and reduce routine tasks. We've got some products that we're working on -- sort of a virtual collector product that many of our clients are interested in, which allows the routine work to go to a bot so that the more complicated work can then flow through your agents. So we think there's an opportunity in the marketplace for that which we're excited about. And then thirdly, we've got a few Regulation F-related products. We think we can build this kind of compliance roadmap into the platform to help our clients navigate. We've got a partner we're working with, so it wouldn't be technology people giving the interpretation. We've got smart people that know how to interpret regs and we would deliver it.

Stephanie Eidelman:

Yeah. Anything that's going to increase the consistency of handling is certainly going to be helpful for adhering to new regulations. Well, is there anything I didn't ask you that I should have?

Ray Peloso:

I think you've covered almost everything. You know, it's interesting when we talk to the marketplace, a lot of our clients are more forward-oriented now than they were in the past. And it shows up in this dialogue that says, we've got this temporary hiatus. COVID was a near-death experience (talking business, not the personal tragedy side of it). And so now we've got this pause and with this pause, we've got this window of opportunity to kind of rethink and reset strategy. So we hear a lot of our clients in the marketplace talking about this window of opportunity to prepare. And so I think that's interesting because that shows up in a variety of different forms and within a variety of different clients.

Stephanie Eidelman:

It is a real business challenge for people to figure out how to plan for the future while still operating in the current environment. That's the challenge. How do you get teams to do both at the same time? Or do you hire simultaneous parallel teams to do both? Of course, it's an investment and it takes some guts. And a little bit of risk.

Ray Peloso:

If you think about last March, April, May, the pandemic hit, and the industry sort of reeled for, let's call it 30 days. But then it was amazing how the industry pivoted. And the existence of a clear and present danger motivated people to innovate and make change quickly. And now it's like, oh, well maybe it's not urgent. So you almost have to create that clear and present danger because it's possible. And I think last year was a really interesting time for the industry because of how much change occurred. You almost have to trick your mind to say, let's create urgency now and have an enemy to go after.

Stephanie Eidelman:

I think you're right. It's incredible what people achieved. I don't know if people feel complacent now, as much as they just feel tired. You can only keep up that pace of urgency for so long. So perhaps this is a lull and then that urgency will come back again.

Ray Peloso:

I think that's true. A favorite phrase of mine is basically, "If you don't like change, you'll hate extinction." Like Tik Tok is illustrative. The world is moving faster and faster. So I get it. I'm tired. You're probably tired. But the world doesn't slow down.

Stephanie Eidelman:

Yes. Unfortunately. Well, this was awesome. We hit a lot of really big topics in just a few minutes. So hopefully this will be a pleasurable listen (or watch) for folks. And, I look forward to the next time.