Good day, ladies and gentlemen, welcome to PayPal's fourth quarter and full year 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question -and -answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's call, Ms. Gabrielle Rabinovitch, Head of Investor Relations. Please go ahead
Thank you, Cherie. Good afternoon, thank you for joining us. Welcome to PayPal Holdings earnings conference call for the 4th quarter and full year 2017. Joining me today on the call are Dan Schulman, our President and CEO, John Rainey, our Chief Financial Officer, and Bill Ready, our Chief Operating Officer. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast. Bo th the presentation and call are available through the investor relations section of our website. We will discuss some non-GAAP measures in talking about our company's performance. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. In addition, management will make forward-looking statements that are based on our current expectations, forecasts, and assumptions and involve risks and uncertainties.
These statements include our guidance for first quarter and full year 2018 and the expected impact of tax reform. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties, and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and available on the investor relations section of our website. You should not rely on any forward-looking statements. All information in this presentation is as of today's date, January 31, 2018. We expressly disclaim any obligation to update the information. With that, let me turn the call over to Dan.
Thank you, Gabrielle, and thanks everyone for joining us on today's call. 2017 was a transformative year for PayPal, with consistently strong and, in many cases, record-breaking results. I'd like to highlight a couple of areas in particular. First, we achieved record net new actives and engagement on our core platform by increasing our reach and relevance with both consumers and merchants. Importantly, we anticipate this elevated level of net new actives to continue in 2018 as we experience increasing network effects from our scale. Second, we continue to grow our market share through our increasing leadership in mobile and by introducing a suite of new and innovative services and product experiences for our customers. Third, we meaningfully strengthened our competitive positioning through the rollout of customer choice.
The combination of customer choice and our move towards an open platform architecture enabled strategic partnerships with many of the world's leading companies. Several of these companies had previously been perceived as potential adversaries. These partnerships have opened new avenues of growth, from geographic expansion to in-store payments. Fourth, we announced a new long-term strategic partnership with Synchrony Financial, which will result in PayPal receiving more than $6 billion in cash proceeds at closing. The deal also frees up more than $1 billion in free cash flow each year, which we will allocate to higher-yielding organic and inorganic growth opportunities. We did all this while delivering consistently strong financial results. I'll discuss the first four areas in more detail in a moment, but I wanna start with our financial results for Q4.
I'm pleased to say that Q4 was our strongest quarter of the year, capping off a landmark 2017. Payment volume grew 29% on a currency- neutral basis to $131.4 billion, generating revenue of $3.71 billion. Revenue grew by 24%, this is our third consecutive quarter of accelerating revenue growth. The strong revenue performance, combined with disciplined OpEx management, drove non-GAAP EPS of $0.55, which was up 30% year-over-year. Our customer metrics were particularly strong. We drove a record 8.7 million net new active accounts.
Ladies and gentlemen, please stand by. Your conference will begin momentarily. Thank you. Speakers, your line is now open.
I'm back. I was in the middle of these exciting results and shocked even our speaker. Let me start off just recapping our fourth quarter. As I mentioned, our payment volume was up 29% on a currency -neutral basis to $131.4 billion, generating revenue of $3.71 billion. Revenue grew by 24%. This is our third consecutive quarter of accelerating revenue growth. The strong revenue performance, combined with disciplined OpEx management, drove our non-GAAP EPS to $0.55, up 30% year-over-year. Our customer metrics were particularly strong. We drove a record 8.7 million net new active accounts. That was up 61% over Q4 of 2016.
We ended the year with 227 million active accounts, adding more than 29 million net new actives for the year. It's worth noting that we now serve 18 million merchants on our platform. Importantly, engagement was once again higher at 33.6 transactions per active account. I think it's instructive to note that our accelerating net new active growth hides the true underlying growth of engagement. If our total net new adds had grown at the same rate as last year, our growth in engagement would have increased 11% to approximately 34.5. It's particularly encouraging that our net new active cohorts acquired in 2017 are showing an acceleration in engagement versus similar cohorts from 2016.
The net takeaway is we are bringing on record net new actives with higher engagement than ever before, and that obviously bodes well as we look ahead. Our partnership with Synchrony Financial accomplishes every goal we set out for our asset-light strategy. The transaction substantially reduces our overall risk profile. It provides us the opportunity to double down on our innovative credit experiences for our merchants and our consumers while sharing in the profit growth. As I said earlier, it frees up approximately $1 billion in annualized cash flows and more than $6 billion in cash. If we combine this cash windfall with the ability to repatriate these funds due to the recently passed tax reform bill, we dramatically increase the flexibility of our cash position, enabling us to more efficiently allocate our capital to higher-yielding opportunities.
John will be sharing more details later in the call about the strategic benefits of our Synchrony partnership, and we'll discuss the impact of the Synchrony transaction on our Q4 results and our expectations for 2018. This past year saw us strengthen our leadership position in digital payments, and we substantially expanded our opportunities for future growth. We introduced a host of new product experiences, and they are driving further differentiation from our competitors. Customer choice is central to this effort and continues to be an important element in the evolution of PayPal. In the fourth quarter, we completed the rollout of choice in the U.S., the U.K., Australia, Canada, and Japan, with 30 million consumers now opted in.
In the U.S., where choice has been live to site for more than 12 months, we continue to see a meaningful lift in engagement and payment volume and a significant reduction in churn. Consistent with previous quarters, our transaction expenses remain well within our expectations, as evidenced by our increasing OI margins. Across the globe, contact rates into our customer service centers continue to decline. In fact, in the fourth quarter of this year, we experienced lower overall call volumes into our customer service centers than we did in Q4 2014, despite our base increasing by 65 million active accounts and literally billions of additional transactions.
I attribute our reduction in call volume to not only choice, but to the tremendous strides Bill and his team have made in enhancing our core experiences from improved availability to decreased latency, to increased feature functionality and reduced friction across our platform. This quarter was particularly significant in the number of new and notable large merchants who joined the PayPal platform. Merchants are increasingly choosing PayPal for our ability to deliver the tools they need to compete and thrive in an increasingly competitive global and mobile environment. If you combine that with the value of the 209 million engaged consumers we bring to their omnichannels, you can see why we have such a strong and compelling value proposition for merchants. This quarter, we signed a global agreement with The Walt Disney Company. We welcomed Dillard's, which ranks among the nation's largest fashion retailers.
QVC has agreed to make PayPal available to their customers. The QVC Group is the number three in e-commerce in North America and number three in mobile commerce in the U.S., according to Internet Retailer. In Europe, ePrice, which is the largest Italian marketplace, began accepting PayPal payments, and Dell began offering PayPal Credit in the U.K. In India, PayPal is available as a way to pay on BookMyShow and MakeMyTrip, the largest online entertainment ticketing platform and the largest online travel company in the country. This holiday season clearly demonstrated the powerful trends that are reshaping retail and driving new consumer behaviors driven by the increasing penetration of smartphones. These trends drove strong mobile engagement on our platform over the busy holiday shopping season.
PayPal processed $48 billion in mobile payment volume in the fourth quarter. That was at 63% growth year-over-year and 36% of our quarterly TPV. For the full year, mobile represented 34% of overall payment volume on our platform, with total mobile payment volume growing 52% to $155 billion for the year. Our leadership in mobile continues to be driven by the exceptional experiences we are able to deliver. We continue to drive fast, frictionless, and engaging consumer experiences with our One Touch product. We ended the fourth quarter with over 80 million consumers opted into One Touch, up from 40 million a year ago. The number of merchants offering One Touch now totals more than eight million, compared with five million a year ago. Venmo continues to define digital payments for a generation of passionate users here in the U.S.
For the first time in a quarter, Venmo surpassed $10 billion in payment volume, with $10.4 billion processed in Q4, an increase of 86% year-over-year. For the full year, Venmo's volume increased 97%, with almost $35 billion in payment volume processed. We also experienced another very strong quarter of net new adds to Venmo and added the largest cohort of annual net new actives to Venmo in its history. We continued our rollout of Pay with Venmo, providing our Venmo users with more ways to pay with the service they love and giving our merchants access to this coveted demographic. While we are still in the early stages of monetization, we are very encouraged by our initial reads on engagement.
In fact, the adoption of services that we are able to monetize on Venmo is tracking above the P2P adoption Venmo experienced at a similar point in its history. Given our experience this past year, we believe our future opportunities are expansive and compelling. We are riding powerful and accelerating tailwinds created by two global trends: the digitization of cash and the mass adoption of mobile devices. We are actively positioning ourselves to take full advantage of these trends and strategically moving our business into areas where we believe these transformations are creating the strongest opportunities. Throughout 2017, we redefined our competitive position in our ecosystem, entering into strategic partnerships with many of the companies leading the digital mobile transformation around the world. We are now in the process of implementing productive and expansive partnerships with Visa, Mastercard, Discover, Bank of America, and China UnionPay.
We are working closely with over 20 of the largest credit card issuers in the world, the majority of which have kicked off campaigns to encourage and, in many cases, incent customers to engage with PayPal. For example, we are working with both Citi and FIS to create experiences that are driving enhanced consumer engagement and activation. With Citi, customers can provision their Citi cards to new or existing PayPal accounts directly from Citi's online properties. With FIS, the ability to link accounts directly to PayPal is now available to all of FIS's banking customers. We signed an agreement with Bank of America to enable PayPal as a way to disburse payments on behalf of their corporate clients. This year, we will integrate credit card reward points from major issuers into our PayPal wallet as a funding source for consumers to use when they purchase at PayPal merchants.
We will also begin to roll out the use of industry- standard tokens to pay in store wherever NFC is accepted. In the quarter, we expanded our partnership with Facebook Messenger, adding a contextual commerce experience that allows sellers send invoices to buyers, as well as adding PayPal as a way to fund P2P transactions within Messenger conversations. In China, where mobile payments are a thriving part of everyday life, our relationships with strategic partners have the potential to substantially increase our opportunity. PayPal is now used by tens of thousands of Chinese merchants on the AliExpress website in order to transact seamlessly with PayPal consumers outside of China. We are also eagerly looking forward to the upcoming launch of our Baidu partnership. In November, we announced the launch of our domestic operations in India, opening another substantial market for PayPal.
While we have been supporting India merchants for years by helping them sell to international buyers, we are now able to work with key merchants to sell domestically as well. We plan to aggressively expand this program to more merchants in India throughout 2018. India is a market in which the government is actively working towards demonetization and building a modern digital economy, and we view India as a strong and compelling opportunity for PayPal. With well more than a billion digital consumers and a thriving online merchant community, deepening our engagement in China and India will continue to be a priority for PayPal in 2018. We believe these markets offer significant opportunities to drive substantial scale. I'd also like to comment on our relationship with eBay. We have a very close partnership and a long history with eBay.
This is governed by an operating agreement that runs for another two and a half years through July 2020. The operating agreement lays out a thoughtful transition and allows for a smooth migration from jointly owned entities to independent companies for the five years following separation. The agreement allows for eBay to eventually become merchant of record and play a more direct role in managing the payment experience on their platform, and we are actively partnering with eBay to help their implementation of merchant of record capabilities. The operating agreement also allows for eBay to work with alternate Payment Service Providers over time as they transition to merchant of record. As part of that, I'm very pleased to announce that PayPal and eBay have signed a term sheet to provide our branded services at least through July 2023.
Both our 2018 and our medium-term guidance already include the anticipated economic impact of the eBay transition, which is quite manageable over a multiyear period. As such, we see no need to change our medium-term guidance. Given our long history with eBay buyers and sellers, both Devin Wenig and I believe a manageable transition and sustained relationship is in the best interest of our mutual customers. I'm very pleased we have agreed to extend our partnership and look forward to building on the strong relationship we've established since separation. As I said at the beginning of my remarks, 2017 was a landmark year for PayPal on multiple fronts. We enter 2018 with strong and accelerating trends supporting our increasingly differentiated and expansive value proposition and scale.
We have extended our branded PayPal relationship with eBay through July 2023, which was one of our primary goals in 2017. These accomplishments set us up for sustainable and predictable growth over the foreseeable future. We fully understand the need to work even harder to live up to and deliver on the value our customers and shareholders expect from us. We have a substantial opportunity to shape the future of digital payments over the next decade, and we are looking forward to another strong year in 2018. With that, I'll turn the call over to John.
Thanks, Dan. I also want to thank all of PayPal's customers, partners, and employees for making 2017 a great year. We achieved many significant milestones in 2017 and are well-positioned to continue delivering on our commitments and executing against our strategic plans. Before I go into details on the fourth quarter, I'd like to provide a few highlights for the full year. For 2017, active accounts grew 15% to 227 million, an acceleration of 500 basis points over the 2016 growth rate. Payment volume grew 27% on a currency- neutral basis to $451 billion. Approximately 34% of this volume was mobile, where we saw 52% volume growth for the year. Revenue for 2017 exceeded $13 billion, growing 21% on a currency -neutral basis.
For the full year, revenue related to eBay Marketplaces grew 7%, while our merchant services revenue grew 24%, more than three times the rate of our legacy eBay Marketplaces business. For the year, non-GAAP EPS grew 27% to $1.90, and we returned more than $1 billion to shareholders. I'd first like to discuss the impact of tax reform. We believe the modernization of the U.S. tax code is a significant step forward and a clear positive for PayPal and its shareholders. The ability to more efficiently and strategically allocate capital is an unmitigated benefit, the full value of which we expect to realize over the medium and long term. I would note that there's still a number of open items that require clarification, and we may refine our estimated impact in future quarters as further information and interpretations become available.
Our fourth quarter GAAP results include a one-time charge of $180 million related to the deemed repatriation of unremitted earnings on foreign subsidiaries and the revaluation of deferred tax assets and liabilities. We expect our non-GAAP effective tax rate to be in the range of 17%-20% over the next three years. We will tighten this range as we get more clarity. I'd now like to review the items included in non-GAAP results from the reclassification of our U.S. consumer credit receivables portfolio to held-for-sale relating to our November agreement with Synchrony Financial. These changes reduce comparability to prior periods. Where relevant to the discussion, I'll provide normalized results to adjust for these changes.
Following the closing of the transaction, which we expect to occur in the third quarter, the U.S. consumer credit portfolio will no longer sit on our balance sheet, and we will no longer incur any costs related to the charge-off of principal or interest. First, other value-added services revenue benefited by approximately $26 million in the quarter as a result of no longer recognizing reserves on interest receivables for the U.S. consumer credit portfolio. Second, transaction and loan losses benefited by approximately $74 million for no longer recognizing reserves on principal receivables for the U.S. consumer credit portfolio. Third, non-transaction -related expenses were negatively impacted by $92 million from the recognition of incurred charge-offs of principal and interest. There's also a GAAP earnings impact from the transaction consistent with our prior disclosures related to the agreement, and those are noted in the investor update posted today.
Moving to our results. For the fourth quarter, our total payment volume was $131 billion, up 32% on a spot basis and 29% on a currency -neutral basis. Merchant services volume grew 33% on a currency -neutral basis to $114 billion, representing 87% of our volume in the quarter. Volume associated with eBay represented 13% of the total, compared to 16% for the fourth quarter of 2016, and 19% two years ago. P2P volume, which is a component of merchant services and includes volumes across Core, Venmo, and Xoom, grew 50% to $27 billion and represented approximately 20% of total payment volume. During the fourth quarter, growth in active accounts was 15%, and we ended the quarter with 227 million customer accounts.
We added 8.7 million active accounts in the quarter. This marks the 4th consecutive quarter where we have experienced an acceleration in the growth of active accounts. In each of the last five quarters, we have added a record number of net new customer accounts. Account growth in the quarter was primarily driven by our core PayPal business, followed by strong growth in Venmo accounts. Revenue grew 24% on a spot basis in Q4, with 23% growth in transaction revenue and 32% growth in other value-added services. Transaction revenue growth was primarily driven by our core PayPal and Braintree businesses. Normalizing for the effect of held-for-sale accounting, revenue growth from other value-added services was driven by strong credit growth on the consumer side, as well as the acquisition of Swift Financial.
Both total and transaction take rates are affected by our hedging program as we recognize hedge gains and losses in international transaction revenue. In the fourth quarter, we incurred a hedging loss of $29 million compared to a $50 million gain in Q4 of 2016, resulting in a $79 million headwind in the period.
For the fourth quarter, our transaction take rate was 2.45%, a decline of 18 basis points from the fourth quarter of 2016, and our total take rate was 2.82%, also down 18 basis points year-over-year. Growth in our P2P businesses led by Venmo and the impact from the hedging loss resulted in approximately two-thirds of the take rate decline, with the remaining five basis point decline resulting from the business mix effect of lower eBay growth in conjunction with strong Braintree growth. Volume-based expenses grew 26% in Q4. Normalizing for the effect of held-for-sale accounting, these expenses would have grown in line with volume growth.
Transaction expense was $1.3 billion and represented 96 basis points of TPV, consistent with the expense rate in Q4 2016 and our expectations that we would see less pressure in the back half of 2017 relative to the first half of the year. Increased core PayPal funding expenses were offset by lower funding costs from growth in P2P. Transaction loss in the quarter was $248 million, or 19 basis points of TPV, flat to the same period last year as well as Q3 2017. Loan losses were $75 million, down nearly 40% from the fourth quarter of 2016 as a result of the effect of held-for-sale accounting on our income statement. We estimate that this change in accounting designation benefited loan losses by approximately $74 million.
Due to the change to held-for-sale accounting, we no longer maintain a reserve for losses and are reflecting incurred losses in the line item called restructuring and other charges on our income statement as part of our non-transaction -related expenses. Our consumer credit portfolio continues to perform in line with our expectations. Transaction margin in dollars was $2.1 billion, growing 23%. Adjusted for the impact of held-for-sale accounting, transaction margin was $2 billion, representing 17% growth versus last year. This represents the highest rate of growth since separation. For the quarter, transaction margin as a rate was 57.1%. On an adjusted basis, transaction margin was 54.8%. Non-transaction -related expenses or other operating expenses grew 19% in the quarter.
Normalizing for the held-for-sale accounting adjustments, these non-transaction -related expenses would have grown approximately 10.5%, resulting in 385 basis points of operating leverage. Further adjusting for the acquisitions of Swift Financial and TIO Networks, we would have seen non-transaction -related expenses grow at approximately 6% for the quarter. Relative to Q4 2016, the fourth quarter of this year, sales and marketing expenses grew 25%. Product development costs increased 10%, and customer support and operations costs grew 7%, consistent with the cadence of discretionary spending that we have previously discussed. In the quarter, there were incremental costs related to our acquisitions of Swift Financial and TIO, which affected the growth of both sales and marketing and customer support costs. In addition, we launched marketing campaigns for our P2P businesses and supported the global launch of our choice initiatives.
In product development, we invested in our India domestic payments business, Pay with Venmo, and in improving our core merchant and consumer experiences. After adjusting for held-for-sale accounting treatment, non-transaction -related expenses increased $0.17 in Q4 for every incremental dollar of revenue. After backing out incremental revenue and costs associated with our acquisitions of Swift Financial and TIO, these expenses increased only $0.11 for every incremental dollar of revenue. For the full year, these expenses increased only $0.10 for every $1 increase in revenue, indicative of the underlying leverage and scalability inherent in our operating model. In the fourth quarter, operating income grew 30% to $807 million on 24% top line growth, resulting in 100 basis points of operating leverage. Non-GAAP earnings per share improved 30% in the fourth quarter to $0.55.
Q4 capital expenditures were $180 million, or approximately 5% of revenue. As a result of changes from the designation of our U.S. consumer credit receivables portfolio, net new loans of $1.3 billion reduced cash flow from operations in the quarter. Prior to this change in designation, this amount would have been recognized in cash flows from investing activities. Cash flow from operations in the fourth quarter was negative $147 million, with free cash flow in the quarter of negative $327 million. On a normalized basis, we would have recognized approximately $972 million in free cash flow, generating approximately $0.26 of free cash flow for every dollar of revenue. We ended the quarter with cash equivalents, and investments of $7.7 billion.
In 2017, we returned $1 billion to shareholders in the form of stock repurchases, buying back our stock at an average price of $51. Our business generates significant free cash flow. In addition, tax reform in conjunction with the expected proceeds from the Synchrony transaction and its implications for our go-forward cash requirements position PayPal with meaningful liquidity, flexibility, and optionality as it relates to capital allocation decisions. We expect to continue to deploy a disciplined and balanced approach to capital allocation to preserve this flexibility and make strategic investments to deliver durable increases in shareholder value and long-term growth. In 2018, we plan to continue investing organically, pursue acquisitions and partnerships, and increase our level of stock repurchases. We are currently executing on tax planning strategies to serve our long-term business objectives.
The consequences of these strategies, in conjunction with regional regulatory and liquidity requirements, may affect our cash repatriation plans. We continue to move toward a more optimal capital structure to support capital allocation decisions and maximize value. In the fourth quarter, we announced a new $3 billion unsecured credit facility and drew down $1 billion at the end of December. I would now like to discuss our guidance for the first quarter of 2018 and the full year. For the full year 2018, we expect revenue between $15 billion and $15.25 billion, representing currency-neutral growth of 14%-16%. This is in line with the guidance update we provided in mid-January and incorporates the expected impact of approximately three and a half points from the sale of our U.S. consumer receivables.
Our guidance contemplates modest expansion in our non-GAAP operating margin in 2018. We anticipate our non-GAAP effective tax rate to be between 17% and 20%. We expect non-GAAP earnings per share of $2.24-$2.30. For 2018, we anticipate free cash flow to exceed $4.5 billion . This is higher than normal due to the sale of our credit receivables next year, the proceeds of which will be split between operating and investing activities on our cash flow statement. For the 1st quarter, we expect revenue in the range of $3.58 billion-$3.63 billion, or 20%-21% growth on a currency-neutral basis. We also expect non-GAAP earnings per share of $0.52-$0.54.
In closing, we are pleased with 2017 and the progress we have made across many fronts. We focused our efforts on building great experiences for our customers, which led to a record consumer and merchant adds to our platform and an acceleration of revenue and earnings growth. We demonstrated sustainable improvements to our cost structure and significantly de-risked our business with the U.S. consumer credit transaction with Synchrony. We look forward to the opportunities we have in 2018 to continue this progress and further increase shareholder value. I'll turn it over to the operator for questions. Thank you.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then one key on your touchtone telephone. We ask that you please limit yourself to one question. You may then return to the queue for any follow-ups. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Heath Terry with Goldman Sachs.
Thanks. Dan, John, there seems to be a bit of a disconnect between the way that eBay's presenting the new partnership or extension versus the way that it's coming across on this call in the press release. The, you know, primarily the difference being the Adyen partnership that, or Adyen partnership that eBay's talking about as being their primary partner now and that they intend to transition the majority of their marketplace customers to this new payment experience that Adyen's powering. Can you help clarify for us a little bit for of how, you know, basically try and connect the dots between those two?
While I know you've talked about there not being any sort of meaningful financial impact here as we get to the end of the original 2020 date, you know, how does that change?
Yeah. Yeah. Thanks for the question, Heath. I'd start off with just saying that eBay and PayPal have had a close relationship and a long history together. I'm really pleased that we're extending that partnership on the branded side through July 2023. As I think most people on the call know, there's a five-year operating agreement that governs our separation, and we're halfway through that. We've got another two and a half years left till the end of July 2020. With this announcement, here there are no changes to any of the terms. The operating agreement was meant to assure both a thoughtful and a smooth transition for both companies post-separation. It assumed in the operating agreement, as have we, that eBay will gradually transition to become an MOR.
Consequently, all of our numbers, all of our plans have always included that assumption. As we've given our medium-term guidance, that's been part of our assumption. As a result.
This announcement does not change our medium-term guidance or the way that we think about our long-term outlook. Let me give you some facts around that because we strongly believe that the eBay transition to MOR is quite manageable for us. Why do we think that? Today, eBay, as John mentioned, is about 13% of our TPV, our total process volume, transaction process volume, and that's down about 900 basis points in the last 2.5 years. Let's just assume that exactly the same thing happens over the next 2.5 years, and that we have no acquisitions ourselves, which by the way, as you know, we are acquisitive. We're aggressive on that. We have a large cash balance that's coming to us, so we can talk about acquisitions later.
That will be a part of our strategy going forward. Assuming no acquisitions, eBay becomes approximately, at the end of the operating agreement, about 4% of our TPV. That's assuming, again, the same amount, the first 2.5 years to the second 2.5 years, and maybe less than 10% of our revenues. If eBay follows the example, and we actually have the great insight because we actually see what happens to marketplaces as they go to MOR, because we've worked with a number of marketplaces. Where marketplaces go to MOR, it typically takes them several years before the majority of their customers move to MOR. We've seen this, and we've experienced it. Post-MOR, we still retain about a 50% share of checkout.
It takes several years post the end of the OA for the majority of customers to move. That's what our experience has been in the real market. Post that, we retain about 50% share of checkout. We think that this is going to be a very manageable transition over multiple years post the end of the OA. I give you two more thoughts on this, and it's very important. One, we renewed the branded relationship with eBay because it is far and away the most profitable element of the relationship. Two, it's the most important to our mutual customers. Three, it also happens to be the largest part of the business by far and away today. The unbranded processing is highly undifferentiated, it's commoditized, and as a result, it yields little to no profit.
As we go through this, we are gonna be able to shed substantial costs because we aren't gonna be doing that unbranded piece of it. We'll still maintain the branded, we'll still maintain the most profitable part of this business and what is today the largest part. There's one other really important element. The OA, the operating agreement, also restricts PayPal from partnering with the largest and fastest-growing marketplaces in the world as an MOR. If we had simply done an extension of the full operating agreement, that would have kept that prohibition in place and prevented us from becoming a fully neutral third-party platform. The opportunity to partner with the world's largest marketplaces is immense.
Today, the top 10 marketplaces that we're allowed to fully service generate tens and tens and tens of billions of dollars of TPV, growing at 56% year-over-year. This is just a fraction of what it could be. If you sum it all up for us, one, we always assumed MOR. It's in our guidance. It's in our plans. Two, we think this is gonna be a very manageable transition over multiple years. Three, it opens up very large and very real opportunities for us to work with the largest next-generation marketplaces post the OA. All in, this was the best possible outcome for PayPal. We're now well-positioned to continue our strong growth, both on the top line and the bottom line as we look ahead. We feel good about where all this has come out.
We looked at it very, very carefully. It's always been in our plans. We feel good now that we have certainty on on the direction that we're going.
Thank you. Our next question comes from Bryan Keane with Deutsche Bank.
Yeah. Hi, guys. Good afternoon. I just wanted to follow up on that. Just trying to understand, my understanding is in 2020, that's when you guys will no longer be the MOR. Just thinking about going forward then, my understanding is PayPal will still be a button of Choice, but it just won't process some of the card payments. Just trying to figure out the economics, what that exactly means when you don't become the MOR and how that impacts the P&L.
Yeah, it's a, it's a great question. One of the things to understand is as we work with, you know, many other retailers out there, you know, they are merchant of record as we work with them. As we are able to go command, you know, even a premium relative to card processing because we deliver greater customer acquisition, higher conversion rates, all those things, we're doing that, you know, across much of our business with, the merchant or marketplace on their side functioning as a merchant of record. As Dan was commenting on earlier, we have quite a lot of insight into exactly how this plays out.
You know, that led to us being able to fully contemplate, you know, that as we have laid our future plans and have been doing so since separation because we know how that works as other marketplaces and other small business forums have either moved to merchant of record, or started as merchant of record with PayPal still as a predominant way of paying inside of those marketplaces or small business forums.
Yeah, Bryan, this is John. I would add to that maybe that, I mean, I think what you're getting to is sort of the economic impact overall. There's a couple things I'd point you to. First is, as Dan suggested in his prepared remarks, you know, our in terms of their percentage of our business, it's declined 900 basis points over the last couple years. During that period, we've actually been able to keep margins flat to growing, right? If you look at the 10 quarters that we've had since separation, the average revenue growth of those quarters for our eBay part of our business has been 4%. If you look at the other 87% of our business, that has grown 23%.
If you know, history is not necessarily, you know, you can't project that forward, but if you were to just take those numbers and project them through to mid-2020 at the end of this operating agreement, that would suggest that in 2021, our revenue growth each year is roughly 50% larger than the entirety of the eBay business at that point in time. The other thing I'd point to is that we actually incur quite a bit of cost to support eBay today. When we look at things like our losses or our call volume into our ops center, those disproportionately skew towards eBay relative to their percentage of the TPV. We feel very confident that we can continue this trajectory going forward.
There's nothing about what's been announced today that changes our thoughts and our ability to continue to grow our top line and bottom line after the operating agreement.
Thank you. Our next question comes from Tien-tsin Huang with JPMorgan.
Hi, thanks. Just a follow-up questions to that. Not sure if you could share how much of your profits come from eBay today, is your ability and your confidence to maintain your midterm guidance, does it require any sort of unusual mediation efforts like cost-cutting or share repurchase? I get the organic cost-cutting or savings from the change, just curious if it requires any extra remediation efforts or even the assumption of new marketplace wins. If I could just tack on one more. Is it fair to think that your checkout share, the 50% number is helpful, is it fair to think that your checkout share would be higher, you know, longer term here just because of how integrated you've been with eBay after all these years? Sorry for all the questions.
Sure. Tien-tsin, I'll start. You know, the assumption that we have going forward about this is that we will continue to realize the benefits from our scale and our leverage going forward. This does not require, you know, massive restructuring or layoffs to continue to achieve the kind of performance that we've seen. As I suggested, we've been doing this for two years, and we would expect as we continue to grow other parts of our business, that we can continue to generate this kind of leverage. I'll point you back to the fact that half of our cost base this year only grow at $0.10 for every incremental dollar. To the other part of your question, does that assume like anything in terms of, you know, acquisitions or anything like that? It does not.
When we think about the, you know, if you go back to my answer to Bryan's question, and you think about losing some share of that business going forward, you know, we're talking about a few points of impact to revenue growth or profitability. That can easily be backfilled going out and looking at inorganic opportunities. This doesn't also address the fact that with the operating agreement ending in mid-2020, we now have the ability to go out and partner with the largest marketplaces in the world, largest and fastest-growing marketplaces in the world. All of this gives us an opportunity to backfill any kind of gap that we might have as we transition through this next chapter with eBay.
Yeah. I'd just also say that our guidance assumes this. What that means is that we knew that this was gonna happen and that the guidance that we've been giving and the medium-term guidance that we've put out there has assumed this happening. That means that we've built into our models costs and things that we know we can target and take out, revenues that we can target. This is not, this is not anything that we haven't
Covered in all of our modeling and all of our plans. Otherwise, we wouldn't have been giving that medium-term guidance. This isn't a surprise. This is exactly what we assumed. It was contemplated in the operating agreement. Consequently, when I think about kind of the experiences we've had, where eBay will be at the end of the operating agreement, this multi-year transition, and our place as a branded checkout solution, I feel like this will be one of these events that will, obviously, we'll have to move through it, but it will be one that's quite manageable for us going forward.
Yeah. One other thing I'd add, Tien-tsin, you talked about, you know, wins with other marketplaces, things like that. As Dan alluded to earlier, and as you know, you know, we're a primary payment platform for many of the best next-gen marketplaces in the world already, Uber, Airbnb, and many others. As Dan alluded to, you know, not only is that, you know, many tens of billions of dollars of volume for us and growing at 50% plus year-over-year already, you know, the growth in that business, as we think about our other large marketplaces, you know, the growth we see in that on an absolute basis, you know, is already outpacing the growth we see from eBay. Just the way that we're already engaging with other marketplaces outpaces the growth that we see from eBay.
As we're able to contemplate engaging there in an unfettered way, we think there's a lot more opportunity ahead for us there. You touched on one other point around share of checkout about being, you know, over-penetrated given our long historical relationship. I, you know, we don't disclose specifics about, you know, the share of checkout there, but, you know, certainly it's reasonable to expect that if we see 50%, you know, approximately with other small business forums, you know, one where we've been natively embedded over time, would be, you know, a place where we, yes, are gonna be, you know, strongly preferred. As you've seen in our consumer base, our engagement is going up consistently across our consumer base.
Your point there about, you know, our share of checkout, you know, we tend to see that as consumers are using PayPal, they're becoming more engaged with us over time, not less. Their preference for PayPal is increasing. We think that is, you know, bodes well for us across any marketplace we work with. Certainly, you know, the big part of the branded deal that we've done with eBay, why that's important to both us and eBay, is the continuity of how a significant portion of their buyers have been choosing to purchase on eBay for a very long time, and likely will continue to into the future.
Thank you. Our next question comes from Sanjay Sakhrani with KBW.
Thanks. Just on that point, on these other partnerships that you could have with marketplaces, how many discussions have you had with some of the larger ones that are opportunities, and how significant economically could those be relative to sort of what you have with eBay? Then maybe just thinking about the transaction cost element of being a lesser merchant for the networks, does that have any impact to your interchange expenses? Thanks.
Just on conversations with other marketplaces. As part of the operating agreement, we're prohibited from offering MOR services to, and I won't name them, to, you know, to the largest and fastest-growing marketplaces out there that are really directly competitive with eBay. That was part of the operating agreement. Obviously, each of them have spoken with us. We've spoken to them, but they all know that we are respecting the terms of the operating agreement just as eBay does as well. I do believe that those conversations are quite sincere and they all do want to think about how they can work with us. Until we get closer to the end of the OA, that's when we'll be able to give you more up-to-date information.
Everything else to this point is confidential.
Thank you. Our next question comes from James Faucette with Morgan Stanley.
Hi, I wanted to ask an additional qualitative follow-up question on eBay. I'm just wondering how we should think about what maybe you had to agree to give or give up in terms of being able to secure the extra years of presence as checkout on eBay and make sure that you would have a presence there through 2023. I guess as part of that, I'm curious, like why agree to whatever now instead of waiting to see if there were some additional services that PayPal could deliver to eBay to improve your positioning and long-term relationship there? Thanks.
James, we thought that within the OA this year coming up was the first year that permitted eBay to experiment with MOR capabilities. It's laid out in the operating agreement that they can choose two countries and do up to 5% of the volume on an MOR solution. It was the right time, and we've always thought that we would never do all these negotiations at the very end. We both feel like we're gonna be partners for a long time. We looked carefully at all parts of this deal, both the unbranded and the branded. We felt that the unbranded piece of this was not something that made sense for us.
One, because we felt the most profitable part of the business was on the branded side, and it's the largest part of the business today. Number two, we in no way wanted to be restricted post-OA in terms of our ability to work with the largest marketplaces out around the globe. For us, we felt like we didn't give anything up to go and do this now. It was a natural extension. It was important to eBay, it was important to us that we both signal that we're gonna be very close partners going forward. Bill, do you wanna add to that?
Yeah. I would just say on this point of, you know, what have we given those things is, you know, as Dan was alluding to, very much like we would serve any other large retailer. When we serve large retailers, we certainly give them rates that are commensurate with their volume, but we're not restricted in ways of, you know, how we would do business with others or things like that. It's very much, you know, along the lines of a standard commercial relationship that we would have with a major retailer.
Let me just add too, one other thing, James, as it relates to the unbranded part of the business. Volume is obviously important to us, but so is profitability. You know, where this was ending up is something that we weren't interested in from a profitability perspective. We can certainly go acquire volume as we've demonstrated each quarter since separation from many other places, we have a lot of confidence and conviction in our ability to do that going forward and do it at more profitable rates than what this unbranded agreement would have been.
Thank you. Our next question comes from Paul Condra with Credit Suisse.
Great. Thanks. Afternoon, everybody. I just wanted to clarify a bit? I know that eBay, it sounds like they're starting this process now with Adyen, so I'm wondering, when are you actually no longer restricted to start looking at partnerships with other marketplaces? My follow-up was, is just on a different topic. You did mention something about industry standard tokens in a point-of-sale setting, and I wonder if you could just give a little bit more detail about that.
I'll take the first part of that, and then Bill can take the second part. We have the ability to partner with many of the marketplaces. As you probably know, we're the underlying payment platform for Airbnb, for Uber, and for others. There were a set of eBay competitors that were carved out within the operating agreement in which we could not serve them as an MOR. That goes away at the end of the operating agreement. At the end of July 2020, that restriction is lifted.
eBay has the ability to start to experiment with alternative PSPs beginning this year, so they can do up to 5% of volume in two countries that they select, and then that can go up to 10% of volume within those two countries the last year of the operating agreement. It's just those that you might think of as being competitive with eBay, we've been prevented from working with them as part of that operating agreement. That made sense for both of us as we separated from eBay. Bill, do you wanna talk about the in-store?
For in-store, you know, what we're really talking about there is just, you know, is the continuation of our implementation of Visa and Mastercard tokens and network standard tokens around our in-store offerings. As we've discussed previously, you know, we work with Google Pay and with others around in-store efforts, and we are continuing to roll out our deployment of standard network tokens around those things consistent with our Visa and Mastercard relationships that we previously announced.
Thank you. Our next question comes from Ashwin Shirvaikar with Citi.
Thanks. Can you comment on both the merchant and consumer engagement trends separately? I think one related question is, it seems payment transactions and revenue per active account are trending higher, but the payment transactions per active account decelerated as well. Would your answer change if you separated out eBay versus non-eBay merchant engagement? Sorry for the multi-part, but kind of want to, want to get an idea of that.
In terms of the overall engagement, which grew by 8%, in my opening remarks, I said if you normalize that, the reason that seems to be decelerating is because we're bringing on so many net new actives in comparison to the years before. When a new customer comes on, and we bring them on throughout the year, they obviously haven't ramped up to the engagement levels that somebody who's been here for a year or two have been. What we take a look at is we look at every one of those cohorts that came on, and we look at their engagement levels, the 2017 cohorts versus the 2016 cohorts that we brought on.
What we see is that our 2017 cohort, which was over 29 million net new actives, have more engagement than the cohorts that we brought in in 2016. What that does is that bodes very well for the future that as those large cohorts of net new actives that are more engaged than ever before start engaging with the platform over time, that takes our engagement levels up. You'd actually see a double-digit increase in engagement if you normalize for the increase in net new actives. I think on the other things, we don't break those out. We just do the one number, although I will say one thing. You can also see that we're having an acceleration in the number of merchants that are coming onto the PayPal platform as well.
We now have 18 million merchants on the platform that's also experienced the same type of growth as we've seen with our consumer growth as well.
Thank you. We have time for one last question from Darrin Peller with Barclays.
All right. Thanks, guys. Look, I mean, I know you're describing the eBay contribution to be relatively minor by the time this rolls off, obviously. It'll give you a lot of opportunities. One of the things you mentioned was deploying capital to help diversify further. I guess I just wanted to hear more given you're now post the Synchrony deal tax reform. There should be a ton of cash available for you guys, a considerable sum unlevered cash. Can you give us more color on potential thoughts around, you know, incremental buybacks the way you've done before? What kind of M&A? How fast? It's been a little while since we've, you know, seen material size M&A. Thanks, guys.
Sure. It's good to speak with you, Darrin. It's John . You know, in terms of our priorities for capital allocation, those haven't changed. Our top priority is always to invest for profitable growth, and that can be both in organic opportunities. It can also be looking at the M&A landscape. We certainly, as you alluded to, given the cash balance and the ability to move that across borders, that we can be much more aggressive there perhaps than we have in the past. We are pretty rigorous in looking at all the different opportunities out there. We're also pretty disciplined in making sure that there's the right return to create shareholder value. You can expect us to be active there.
At the same point in time, we fundamentally believe that returning cash to shareholders is absolutely a good thing. The thing that I would want to impress upon you, though, is that we don't feel pressured to go out and do that immediately to try to show additional accretion or anything like that. Being measured and thoughtful in this area creates opportunities, and it creates opportunities that over the long term could pay back much more than going out and, for example, taking a large chunk of our international cash and doing a stock buyback. We believe there's a fine balance there, and we'll do that, and we'll acquire companies and return cash to shareholders as when the time is right for all of those.
You could expect us to be active on all of those fronts.
Yeah. I would just say to add to John's point, that we are happy with the set of assets and capabilities we have today. We've got a very robust product pipeline, and we're ready to compete as a leader in the market, and I think we're playing from a position of strength. I have to agree with John. I think that our balance sheet is a strong weapon for us. $7 billion of cash. We're gonna bring in another $6 billion. We've got strong free cash flow each year. We intend to stay acquisitive and be a consolidator in the industry. We do look at hundreds of opportunities every quarter, from small investments to larger ones. We have a set of criteria that we look at. We're very disciplined. It needs to fit into our vision and mission.
It needs to accelerate our progress across either a key vertical, a geography, or some piece of technology that we don't have. Bottom line, expect us to be acquisitive, as John said, in both a disciplined and a thoughtful manner. Okay. Well, I want to thank everybody for your time, for joining us today. We really appreciate it, and we look forward to speaking with you soon. Thank you.
Thank you.
Thank you, operator.
This concludes today's question and answer session. Ladies and gentlemen, thank you for your participation in today's conference call. This concludes the program, and you may disconnect now. Everyone, have a great afternoon.