Credit-Card Portfolio Profitability and Partnership Evaluation

Context

You are analyzing a mature credit-card portfolio to assess its current profitability and to evaluate a potential acquisition partnership that would bring in new users at a proposed cost per acquired user.

Assume the portfolio monetizes via purchase interchange and interest on revolving balances, and incurs costs for rewards, credit losses, servicing, and overhead. Acquisition costs already spent for existing users are sunk; only incremental acquisition costs matter for new users.

Task

1. Build a clear revenue–cost framework for a credit-card user.
2. Compute:
   • Current per-user annual profit
   • Current aggregate annual profit for the existing portfolio
3. Evaluate a proposed partnership that acquires new users at a cost per acquired user (CAC). Determine if it is financially worthwhile.
4. Perform a sensitivity analysis on key assumptions (e.g., spend, interchange and rewards rates, revolve/interest, credit losses, CAC).

Inputs (define or request as needed)

• Annual purchase volume per active user (S)
• Interchange rate (i, % of S)
• Rewards rate (w, % of S)
• Average carried balance (B)
• APR on carried balance (r_APR)
• Expected annual charge-off rate on receivables (c_loss, % of B)
• Cost of funds on receivables (r_fund)
• Annual fee and other fees per user (F)
• Servicing/operations cost per user (C_serv)
• Allocated fixed overhead per user (C_fixed)
• Current active users (N)
• Partnership CAC per acquired user (CAC_partner)
• Optional: Annual retention/survival by year and discount rate for LTV

Deliverables

• Show formulas and a worked numeric example.
• State assumptions clearly.
• Provide a break-even CAC and a recommendation with sensitivity discussion.