Good day, ladies and gentlemen, welcome to PayPal's third quarter 2016 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 is being recorded. I would now like to introduce your host for today's conference, Ms. Gabrielle Rabinovitch, Senior Director of Investor Relations. Please go ahead.
Thank you, Esther. Good afternoon, thank you for joining us. Welcome to PayPal Holdings earnings conference call for the third quarter of 2016. 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 broadcast on the internet, both the presentation and call are available through the investor relations section of our website. In discussing year-over-year comparisons, including guidance growth rates for the full year 2016, we have chosen to present non-GAAP pro forma metrics because we believe that these metrics provide investors a consistent basis for reviewing the company's performance across different periods. We will also discuss some non-GAAP measures in talking about our company's performance, including the non-GAAP pro forma metrics mentioned above.
You can find a reconciliation of these non-GAAP metrics to the most directly comparable GAAP metrics 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 fourth quarter and full year 2016, as well as our outlook for 2017 and the next three years. Our actual results may differ materially from those discussed in this call. You can find more information about risks, uncertainties, and other factors that could affect our operating results in our 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, October 20, 2016.
We disclaim any obligation to update the information. With that, let me turn the call over to Dan.
Thank you, Gabrielle. I'm pleased to say that PayPal delivered another quarter of strong results. We made significant strides in the quarter, forging new partnerships and delivering continued innovation to our customers. We feel well-positioned for future growth and profitability. I'll start my remarks with our financial performance. In the quarter, we reported $0.35 of non-GAAP EPS at the high end of our non-GAAP guidance of $0.33-$0.35. We delivered $2.67 billion in revenues, an increase of 21% over last year on an FX-neutral basis. We generated $618 million in free cash flow. We increased the number of active customers and accelerated their engagement on the PayPal platform. We finished the quarter with 192 million active customer accounts, adding 19 million new accounts in the past 12 months.
Transactions per account continue to increase, reaching 30 for the first time, up from 27 a year ago. In the quarter, PayPal processed over $87 billion in TPV, up 28% over last year on an FX-neutral basis. These results reinforce our belief that the opportunities for PayPal to grow and gain share have never been greater. We are executing against our strategic plan with intensity and speed. We are committed to seizing the opportunities in front of us by truly embracing the mantle of customer champion. Being a customer champion means always prioritizing the needs of our customers. It means continually re-examining our business to improve the customer experience on our platform and to provide real differentiated value to both consumers and merchants. By making customer choice a priority for PayPal, we are creating a significantly better customer experience to accelerate adoption and drive engagement.
In the quarter, we made meaningful progress in offering customer choice in our online and mobile checkout and in our P2P experiences. These have enhanced how our customers in the U.S. can send money, shop, and pay with PayPal. Our customers are now able to set their preferred funding type in their PayPal wallet to sources other than their PayPal balance. This gives customers the option to default to their favorite debit card, bank account, or credit card, and we've seen a corresponding increase in engagement. As we have demonstrated over the past several months, customer choice is also allowing us to forge valuable new strategic partnerships across the ecosystem. Since our announced agreement with Visa, we have also entered into a strategic partnership with Mastercard, which offers consumers greater choice and flexibility to manage and move their money.
It ensures that Mastercard cardholders can easily identify and choose Mastercard within the PayPal wallet. Our joint U.S. customers will be able to use their tokenization services to make in-store purchases at Mastercard's contactless-enabled merchant locations around the world. Along with our agreement with Visa, the deal with Mastercard exempts PayPal from current or future digital wallet fees and provides cost certainty for years to come. Thanks to our agreements with Visa and Mastercard, PayPal now has a seamless, quick, and simple way to activate PayPal payments at the point of sale. Our agreements with the payment networks are opening the doors to deeper and more engaged conversations with a host of financial institutions about how to drive incremental spend for their brands and better, more innovative experiences for our mutual customers.
These conversations have been very positive, and we are encouraged by the progress we are making in partnering with issuers. We also are significantly extending our previous agreements with Alibaba. We just launched the first stages of becoming a payment option on Alibaba's global retail marketplace, AliExpress. This partnership has the potential to drive meaningful cross-border traffic as PayPal consumers outside of China shop on AliExpress merchants in China. While we are excited by these new and expanded partnerships, we are equally pleased with the progress we are making with previously announced partners, such as América Móvil, which is set to go live this quarter. We are working with América Móvil to help their more than 140 million customers in Mexico and Brazil manage and move money with their Telcel and Claro digital wallets, powered by PayPal's platform.
We also deepened our existing relationships with some of the world's leading technology companies, including Facebook and Apple. With Apple's new iOS 10, Venmo users with iPhones can now ask Siri to send and request money from friends, and also send P2P payments within the Messages app. These new experiences make sending and receiving money even easier and increase the relevance of Venmo by introducing the service in more contexts than ever before. With each partnership agreement that we sign or extend, we further expand the ubiquity and value of the PayPal brand and move closer towards our vision of becoming an everyday, essential financial service for people around the world. We believe offering consumers choice in how they want to pay and where they want to pay is essential in becoming an everyday part of a customer's financial life.
As we've shared previously, the average Venmo user already interacts with the app more than two times per week, and we are beginning to see some additional proof points that our strategy and partnerships are moving us towards our long-term engagement goals. For instance, our initial launch into Spain with Vodafone and Visa, which provides customers the chance to pay online, in-app, and in-store, is already generating over six in-store transactions per month per active user, and the PayPal Vodafone service is now available in Italy and the U.K. We also made a further announcement with Visa to include the integration of Visa Checkout into Braintree. Braintree also announced several other new payment options in Q3, including Apple Pay on the Web, Mastercard Masterpass, China UnionPay, and PayPal Credit.
Another way we're executing against our customer champion vision is by being a true payments partner to our merchants to help them succeed in an increasingly connected and mobile-centric world. Mobile technology continues to erase the line that divides online from offline, and commerce is moving into entirely new contexts. PayPal helps merchants navigate this disruptive environment and is increasingly the payments partner of choice to merchants of all sizes. We continue to move aggressively towards our goal of processing 100% share of checkout for merchants. This strategic focus enabled PayPal to grow its market share during the quarter. Our merchant services payment volumes once again grew faster than the growth of e-commerce. Merchant services payment volume grew to $73 billion in the third quarter, up 34% year-over-year on an FX-neutral basis. PayPal also continued its strong growth in mobile payments.
In the quarter, we processed $26 billion in mobile payments, up 56% over last year. Mobile continues to become an increasingly relevant part of our platform, now representing approximately 30% of our volume. We are on track to process well over $100 billion in mobile payment volume in the next 12 months. This is a remarkable achievement considering we've cumulatively processed some $200 billion in mobile volume over the past 10 years. Our growth online and in mobile is being driven by some of the world's top merchants choosing PayPal. These include the American Red Cross, which expanded their integration with PayPal to include our MassPay product. We also worked with the American Red Cross in the quarter to support flood relief efforts in Louisiana by waiving our fees on the donations raised.
H&M, the global fashion retailer, launched with PayPal as a payment option on its websites in France, Italy, Spain, and the U.K. Costco de México became the first subsidiary of the global membership-only warehouse club to integrate PayPal as a payment method for its online store. Yandex.Direct, the paid search platform for Yandex, Russia's most popular search engine, went live with PayPal. We expanded our relationship with Uber to make PayPal a way to pay for rides in Costa Rica, Panama, Colombia, Chile, Uruguay, Peru, and Brazil. Braintree also added numerous new merchants, including Six Flags and Yelp. Being a customer champion demands constant innovation for our customers. As One Touch demonstrates, when you create truly transformative experiences, you drive engagement. We now have more than 32 million consumers and more than 4 million merchants using One Touch.
By the end of the year, we now expect 5 million merchant accounts to be offering One Touch to approximately 36 million consumer accounts. Venmo continues to expand its reach and is becoming a daily part of the lives of mobile and social media-connected consumers. In the quarter, Venmo processed $4.9 billion in volume, an increase of 131% year-over-year. It is now just shy of a $20 billion annual run rate. We are excited that Pay with Venmo is now generally available to all Venmo users, and we are pleased that giving users a new way to use their Venmo account is resulting in increased engagement. Early data suggests that people who use Pay with Venmo are approximately 30% more engaged than other Venmo users. We are now ready to more rapidly expand the number of merchants accepting Venmo as we exit 2016 and go into next year.
Xoom is also driving significant innovation. Xoom recently added a new request feature, which allows remittances to become a two-way interaction between senders and receivers for the first time. Remittance recipients in 29 countries can now request funds, bill payments, or mobile reloads from customers in the U.S. through the Xoom platform. Additionally, PayPal customers can now link their PayPal and Xoom accounts, giving customers access to their PayPal funding sources within Xoom. This will allow PayPal's U.S. customers to send funds to multiple new markets and get access to new services. As we shared at the time of the acquisition, cross-selling Xoom to our U.S. PayPal customers is a meaningful way to drive additional adoption and engagement with PayPal's 87 million active U.S. customers. In the third quarter, Paydiant launched an exciting new mobile payment experience created for the Autogrill group in Italy.
Autogrill is the world's leading provider of food and beverage services for travelers, operating mainly in airports, on highways, and in railway stations. This international application of Paydiant's technology was made possible by PayPal's global reach and the integration of our platforms. Finally, the third quarter saw PayPal receive some remarkable industry recognition. Venmo was named as one of Interbrand's Breakthrough Brands in their 2016 ranking of 60 companies that are younger than 10 years old, that are driving significant change by creating new experiences for consumers. PayPal gained seven spots and increased its brand value by 14% on the 2016 Interbrand Best Global Brands ranking, making PayPal, once again, one of the 100 most valuable brands in the world. I'm also pleased to announce that PayPal has been included on Fortune's 2016 Change the World list, a ranking of 50 companies that are doing well by doing good.
This is a meaningful recognition for the PayPal team, and we are very proud of achieving the number 19 spot on that list. Finally, Group XP, a part of WPP, named PayPal as one of the top three consumer experience brands in the world based on branding, design, content, online presence, and user experience. The past six months have been historic ones for us. We have embarked on a course that enables us to become a true customer champion. We are partnering across multiple ecosystems, from retailers to OEMs, to wireless carriers, technology companies, and with financial institutions and networks. We strongly believe that this positions us for long-term growth and profitability. Consequently, we are increasing our three-year outlook for revenue to 16%-17% FX-neutral growth, in contrast to the 15% previously guided. We expect our free cash flow to grow in line with our revenue growth.
Importantly, we believe our non-GAAP operating margin will be stable to growing. John will provide more details on our outlook in his portion of the call. In the past two years, in the face of one competitive announcement after another, we have attracted 35 million net new active accounts. Our engagement per active account has grown from 24-30 times per year. Our merchant base now totals 15 million active accounts, and our mobile payments volume and unique innovative capabilities continue to drive our growth. We believe the partnerships we have signed enable us to clearly, predictably, and profitably pursue the $100 trillion total addressable market that is slowly but surely digitizing. I believe we now have the platform, capabilities, scale, and partnerships to enable us to drive profitable growth, not just next year, but over the medium and long term.
With that, let me turn the call to John.
Thanks, Dan. I also want to thank all of PayPal's customers and our employees worldwide for making this another great quarter. As Dan discussed, in the third quarter, we made great strides executing against our customer champion strategy and partnering across the payments ecosystem to drive ubiquity. We enhanced our value proposition for both consumers and merchants and laid the groundwork for long-term sustainable growth across our platform. First, I will walk you through the financial highlights for our third quarter. On a currency-neutral basis, total payment volume increased 28% to $87 billion. U.S. payment volume grew 25%, and international volume grew 30%. Our merchant services business grew 34% to $73 billion, primarily driven by Core, Braintree, and Venmo. We ended the quarter with 192 million active accounts, adding 4.4 million active customer accounts in the quarter and increasing our active accounts by 11% from the third quarter last year.
Our core PayPal business, Venmo, and Xoom were strong contributors to account growth. The number of payment transactions per account increased to 30, up 13%. Increased engagement in conjunction with continued double-digit growth in active accounts resulted in payment transaction growth of 24% year-over-year. In the third quarter, we generated revenue of $2.67 billion, up 21% on a currency-neutral basis and 18% on a spot basis. Q3 revenue growth accelerated both sequentially and year-over-year as a result of strong performance in our core business and Braintree. Transaction revenue increased 20% on a currency-neutral basis in the quarter. Performance was driven by growth in our core business, in particular with large merchants, and strength in the Braintree business. This resulted in a transaction take rate of 2.65% for the third quarter.
The 19 basis point decline was primarily driven by the growth of our P2P business and the mix shift towards Braintree and larger merchants. Revenue from other value-added services grew 28% versus last year, driven by growth in our credit products. In the quarter, transaction expense and transaction and loan losses were $830 million and $271 million respectively. In the aggregate, these volume-based expenses increased 29%, resulting in a transaction margin of 58.7% versus 62.3% in Q3 2015. The transaction margin decline year-over-year was primarily driven by the mix shift in our business toward Braintree and increased provisions in our credit business, partially offset by Xoom. As we had discussed previously, in the third quarter, we made investments to further drive customer acquisition and engagement, and in our compliance efforts and corporate functions, which increased operating expenses in the quarter.
Despite these investments, other operating expenses grew 13%, well below revenue growth, and drove 200 basis points of leverage. To give you a bit more color on our non-GAAP operating expenses in the quarter, I will quickly run through the line items. Customer support and operations expense was $304 million. Sales and marketing expense was $212 million. Product development was $181 million. G&A costs were $229 million, and depreciation and amortization expenses were $150 million. Excluding the acquisition of Xoom, our other operating expenses increased only 9%, or approximately half the rate of revenue growth, once again demonstrating good cost control. We continue to be focused on expense discipline and see significant opportunities to manage our other expense line items over time.
In the third quarter, leverage in our other operating expenses partially offset the transaction margin decline, resulting in a non-GAAP operating margin of 18.4% and non-GAAP operating income of $490 million. Our third quarter non-GAAP effective tax rate was 15.3% versus 17.7% in Q3 2015, due primarily to discrete tax items. non-GAAP EPS grew 14% to $0.35 for the quarter. Strong cash earnings generation resulted in 19% growth in free cash flow year-over-year. Our free cash flow for the third quarter was $618 million, representing $0.23 of free cash flow for every dollar of revenue. Third quarter CapEx were $183 million, or approximately 7% of revenue. During the quarter, we returned approximately $50 million to shareholders by buying back an additional 1.3 million shares. Year-to-date, we have returned approximately $945 million to shareholders by repurchasing 26 million shares at an average price of $36.37.
We ended the quarter with cash equivalents, and investments of $6.4 billion, including approximately $1.3 billion in the U.S. At the end of the third quarter, the total outstanding balances in our pool of consumer and merchant receivables were $4.5 billion and $581 million respectively. For our consumer portfolio, the principal charge-off rate in the quarter was 6%, and we recognized $114 million as a provision for loan losses. The balance amount of our allowance for consumer loans and interest receivable is now $282 million. We've frequently spoken about moving to an asset-light credit strategy. I'm pleased to say that we recently signed a strategic partnership agreement with Latitude Financial Services to develop new consumer financing products for PayPal's customers in Australia. The relationship will leverage PayPal's strengths in technology, but the receivables will be funded by Latitude.
We'll share more on this, as well as a more comprehensive off-balance sheet strategy as we move through 2017. As Dan mentioned, given the partnerships we've established, the response we've seen on our platform to the initial rollout of our choice experiences, and the ongoing momentum in our business, we are better positioned today to provide you with an updated three-year outlook, as well as a framework for how to begin thinking about 2017. Over the next three years, we expect total payment volume growth of mid-20% on a currency-neutral basis. We are raising our outlook for revenue growth to 16%-17% on a currency-neutral basis, up from the 15% which we shared at Analyst Day in May of this year. We expect operating margins to be stable to growing on a non-GAAP basis. We also expect free cash flow to grow in line with revenue.
Further, as we pursue a more asset-light credit strategy, we expect less of our free cash flow to be directed towards funding credit in the future. For 2017, we estimate our revenue growth to be in line with our updated three-year outlook, or 16%-17% on a currency-neutral basis. We also expect that the incremental expense related to our customer choice initiatives will be offset by other revenue and cost initiatives, resulting in operating margin consistent with full-year 2016. More detailed guidance for 2017 will be provided when we report fourth quarter and full-year 2016 earnings. Finally, I would like to discuss our financial guidance for the fourth quarter and full year 2016. Year-to-date, we have delivered strong performance and outstanding growth across our platform. For the full year, we expect revenue in the range of $10.78 billion-$10.85 billion, or 20% growth on a currency-neutral basis.
We expect non-GAAP earnings per share in the range of $1.48 to $1.50, representing growth of 18% at the high end. We now expect free cash flow for the full year to exceed $2.2 billion. We are also reaffirming our prior full-year 2016 guidance on CapEx and non-GAAP effective tax rate. For the fourth quarter, we expect revenue in the range of $2.92 billion to $2.99 billion, or 16%-19% growth on a currency neutral basis. We expect non-GAAP earnings of $0.40 to $0.42 per share. In conclusion, our third quarter results demonstrate our ability to deliver exceptional revenue growth and free cash flow while advancing our strategic priorities. Our scale affords us continued leverage opportunities across our other operating expenses. In addition, the cash flow generating power of this business gives us great flexibility as we allocate capital with discipline.
We are focused on creating value for our shareholders and strengthening our position as the world's leading digital payments platform for our customers. With that, I'll turn it over to the operator for questions. Thank you.
Thank you. Ladies and gentlemen, at this time, if you have a question, please press star then number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. As a reminder, we ask that you please limit yourself to one question and return to the queue for any additional follow-ups. Our first question comes the line of Bryan Keane with Deutsche Bank. Your line is now open.
Hi guys. John, do you have concerns about the performance of the credit portfolio? Can you provide any more detail on how you're feeling about the credit business short-term and long-term and the use of free cash flow towards credit?
Sure. Bryan, it's good to speak with you. I'll start higher level. I think it's important to give context here. Credit is a very small part of our business. It's about 2% of our overall volume, but it's also a very important part of our business. It complements a holistic set of payment offerings for our customers, and our merchants ask for it to be integrated into the checkout experience because they see firsthand the benefits of improved conversion and higher basket size. That said, as I discussed in my prepared remarks, we can obtain a lot of the benefits from credit by doing it in a more asset light way, which we'll disclose more about later. Overall, we're very comfortable with the performance of our portfolio, and I would suggest that it's in line with our expectations.
We did increase our provision. As I discussed on the last earnings call, we have seen some deterioration in our late-stage delinquencies, we've also seen a lot of signs of health too, in that our weighted average FICO scores improved from the last quarter. We've also seen the lowest quarterly charge-off rate in four quarters this year. We're obviously coming off of historic lows in credit, I think getting to something that is a more normalized rate going forward. That rate is very consistent with both our underwriting expectations as well as our return goals for the business. We're comfortable with credit. Thinking longer term about what we do, the agreement with Latitude is a good indication of how we're thinking about moving forward with credit. We also can do something with our existing portfolio, and we've got several different options that we're evaluating.
Some of those take time because they could be bigger in nature. We plan to discuss those in the coming quarters. Thanks, Bryan.
Okay. Yeah, just a quick follow-up. Looking at the three-year outlook, the FX-neutral revenue growth is 100 to 200 basis points higher than the previous midterm guidance. The FX-neutral TPV growth is the same at mid 20s. What drives that higher revenue growth with the same volume expectations? Thanks so much. Congrats on the quarter.
You bet. I wouldn't read too much into that, Bryan. The mid-20s TPV growth is a broader range than the 16%-17%. While that's not updated, we obviously do have some expectation about an improvement in payment volume as well.
Okay, thanks.
Our next question comes on the line of Darrin Peller with Barclays. Your line is now open.
Thanks, guys. Just looking for a little more color on the dynamics behind margins in 2017 and your medium-term outlook. I guess margins being down about 150 basis points in the quarter. First of all, I guess if you could just tell us maybe what it would've been without any maybe hedging impacts or Xoom investments. Looking at the outlook you gave, I know you mentioned certain revenue or products that would help offset margin pressure from customer choice. Is that PayPal Credit or are there other products around that? Thanks, guys.
I'm sorry, what was the last thing that you said there?
Just trying to figure out, you mentioned in the longer term, or I think the 2017 outlook, that margins could be holding up for 2016 levels based on basically other products, other revenue, and some cost initiatives. Just wondering if those other products is PayPal Credit or if there's other products in there.
Okay. Yeah. Sorry, I didn't hear that. Okay. I'll start and maybe a couple of the other guys can jump in. Specifically, you asked about the effect of hedging in the quarter. Hedging was about a point of EPS for the quarter versus last year for us. Our hedge gain was about $28 million-$30 million in the quarter, and it was $10 million-$15 million higher last year. That certainly affected the margin performance in the quarter. I would want to emphasize though that we indicated this when we gave the guidance last time in the last call. We made some investments in our business in the quarter. You typically think of the seasonality of our business. Our fourth quarter can be 15%-20% larger than the third quarter, and we tend to staff up in certain areas to prepare for that.
We look at the opportunity that we have in front of us, which everyone recognizes with the huge addressable market. That does require some investing, and we're not going to shy away- that. We've indicated that we expect margins to be stable to growing over time, but we're not going to be a slave to margin performance from one quarter to the next, particularly if it means that it's at the expense of investing in the business. That said, we also recognize that we don't get a pass from the market, and we're going to continue to drive revenue growth and earnings performance like we've seen. With respect to some of our products, we've got a host of different things that Bill and his team are working on. I wouldn't necessarily pinpoint credit as the opportunity in terms of product expansion next year.
We're thinking more broadly just in terms of how we can offer other types of products and experiences for our customers.
All right. Thanks, guys.
You bet.
Our next question comes from the line of Tien-Tsin Huang with J.P. Morgan. Your line is now open.
Great. Thanks for all the details here. Just wanted to dig into the raise revenue outlook. How much of that raise is coming from customer choice made possible by the Visa and Mastercard deals? I'm asking for both next year and also in the midterm. For example, is there a backlog of new issuer partnerships? Just trying to gauge where your confidence is coming from.
I'll take that and then turn it over to either Bill or John from there. Thanks for the question. I think just in general, if you step back, we think we have an incredibly large opportunity in front of us. Think about it. We're 10% of e-commerce, and e-commerce is 10% of retail. When we look at the addressable opportunity in front of us, we think we have maybe a percent share or something like that. There's a tremendous amount of opportunity in front of us, and we are seeing very good momentum in the business right now. Bill and his team have put into place over the course of this year, a number of new services, a number of new products. We've upgraded a lot of our flows by the upgrading of our platform.
We see a tremendous amount of momentum coming into the business. Obviously, as we think about choice, we think about choice more over the medium and the longer term pieces of this in terms of its impact in terms of growth for us. As we think about next year, we think really about the momentum of the business carrying us into that as we think further out. Obviously, the increased adoption, engagement, and the other services and offerings that we're putting out beyond choice that will go into the market will all fuel that growth. Then on the margin side, as John mentioned, we feel we have a lot of room in our cost structure, a lot of OpEx room. We also, in addition to that, are putting out new services and new enhancements that have increased margin associated with them.
As we looked at our medium term or our three-year outlook, we felt very comfortable taking that revenue outlook up and maintaining our margin guidance.
All right. That's great. Thanks so much.
Our next question comes from the line of Ashwin Shirvaikar with Citi. Your line is now open.
Yeah. My question is with regards to the 2017 guide itself and any specific assumptions you're making in there with regards the market implementation of Visa, Mastercard deals, and what form do you expect some of these deals to take, what's the purview of what you're actually discussing with issuers?
Yeah. I'll let Bill answer some of the issuer things that we're talking about. I would just say that as you look into 2017 the vast majority of that is the current momentum of the business. The Visa, Mastercard, the issuer implementation, those will happen as we go through next year we don't assume a lot of either revenue or volume increases as a result of that. We're trying to be reasonably conservative on what we will see next year from that. As I mentioned in my opening remarks, Bill can expand on this, we are having quite a number of conversations with issuers, both large and small, in terms of ways that we can partner together. I'll let Bill get into the details of that. The overall tenor of those discussions are extremely positive.
One other thing I'll just say before I turn it to Bill is with the tokenization schema that we have from the networks, the issuers don't need to do anything. They just need to opt into it. We don't need to put out announcements for every one of these, and we don't plan to go and do that either. There'll be some that we'll announce, no doubt, but the majority of those, since there's really nothing that needs to be done, the issuer just needs to opt-in, we'll just start to implement.
Yeah. I just added that to Dan's point. While the issuers don't need to do things to enable us to use tokens and those types of things that we're receiving from Visa and Mastercard is just an opt-in, it's also the case that the things we're doing around choice, we're able to do and deliver value to our customers and the ecosystem without them having to do work on their end. This isn't really a framework of a lot of one-off announcements, but one where we set a framework of how we work with the broader industry. We're seeing from the experiences we've rolled out already that, as was mentioned earlier in the call by Dan and John, engagement lift, those types of things that we have been seeing from consumer choice even ahead of our deals with Visa and Mastercard, and the broader ecosystem.
We're seeing those things play out in a way that is very much in line with how we thought about going into choice overall.
It just seems like you're assuming cost, but not assuming potential revenue benefits.
I think that's predominantly right on that there'll be smaller amounts of revenue benefit in 2017. We are able to cut out not just cost in our OpEx. I'll give you one example of that. Obviously, we have a good percentage of our calls coming into our customer care centers are around funding type. Since we're going to be implementing that, those costs are something that we can take out of our business immediately. There are other pieces of the cost structure that we can elaborate on if you're interested, that we will address. On top of that, we have added quite a number of new products this year that are giving us incremental margin, incremental lift, and engagement, such as One Touch is a perfect example of that, and that will carry over into next year as well.
Great. Thank you.
Our next question comes the line of Jason Kupferberg with Jefferies. Your line is now open.
Good afternoon, guys. I just wanted to start with a very quick clarification. I know you said next three years on the medium-term guidance, so through 2019, would that be accurate?
Yes, more or less. Three years is probably too precise, as you can fully appreciate when you get into a longer-term planning horizon that there's less certainty with each passing year. We tend to think of how we're running the business in that multi-year, three-ish year timeframe. I think that's accurate. I don't know that we want to be so specific as to say that it ends at December 31st-
Correct
of 2019.
Okay.
That's the way that we set our three-year outlook. Yes, end of 2019. I think John's point is a good one.
Okay, understood. Just on operating margin. In the quarter, what was the headwind on operating margins from Xoom? It looks like in your Q4 guide, we're seeing implied operating margins to be modestly up year-over-year. Is that accurate?
Yes. You could take the guidance range and infer that. Xoom has been, as we've talked consistently this year, a little bit of a drag on our margins. I would actually point, though, that the bigger impact in the quarter on operating margin was related to the increased provision around credit. We've talked for a long time about the different levers we have in the business. Even despite having that increase in cost in the quarter, I think we demonstrate our ability to pull those levers by still coming in at the high end of our guidance range.
Okay. Thank you for the color.
Our next question comes the line of Scott Devitt with Stifel. Your line is now open.
Hi, thanks for taking the question. First, Dan, you mentioned in the press release the rollout of the customer choice in the U.S., I just wonder if you could talk a little bit more about where you are with that in the U.S. and the roadmap on a global basis in coming quarters. Then secondly, as you think about the business strategically, now that you're in all these different areas of financial services layered on top of the B2C payments platform, was wondering if you could just talk a little bit about your interest in being in other verticals, and if so, what those are? Or should we think about the business more in terms of where you are now, in terms of businesses and growing wallet share within those businesses? Thank you.
Let me take the more strategic part of that question, which is where do we see ourselves going? Then turn over to Bill to talk explicitly around where we are in the customer choice rollout piece of it. We've talked a little bit about PayPal moving from being well beyond just a button on a website to really two things. For merchants, we want to be a full-service solution provider. As the world moves towards mobile, merchants are looking to write applications to take advantage of that mobile across online, in-app, mobile web, and in-store. They're trying to create those applications to enable them to get closer to consumers and create distinct differentiated value propositions. We basically want to power those applications with our platform. We want to do 100% share of checkout. We want to integrate rewards capabilities
Through API and tool sets into our platform. We want to integrate contextual commerce into our platform, credit into our platform, so that merchants of all sizes can write the applications that get them closer to their customers, and we can power that with our platform. Then we take the extensive number of consumers we have, the 177 million consumers we have on top of the 15 million merchants we have, we drive those consumers in a friction-free way to be able to sign up for those merchant apps. We are really trying to be a much more extensive partner to merchants as they make this change in a mobile-centric world. Things like the One Touch, the conversion rate, and all of that is tremendously powerful for them.
On the consumer side, we were looking to be much more in the middle of how consumers manage their money. We've talked about our longer-term engagement goals, which are to go from, well, now we're two and a half times a month. We were two times a month when we started that. To go to something like two times a week. We know that's a longer-term goal. If you look at what we've done with Choice, enabling consumers to not just pay how they want, but where they want, and this is why I gave the example in Spain. It's obviously very early days, and not a significant number of customers yet. Those customers just offline are using the service six times a month on there. You can start to see that engagement. We are looking at a host of other things.
We've now integrated into Xoom so that U.S. customers of PayPal can now use international remittances. It's another service offering on top of that. I don't want to give away any future plans right now on the call, you can expect us to continue to grow the set of offerings that we give to consumers. As you look out over the medium term, you can expect us to continue to expand and grow our business, not just take the business we have and follow the tailwinds of digitization, but to really drive that.
On the point of the roadmap for the customer Choice implementation, as we've discussed previously, I call out that many of those core concepts we have been testing even prior to these deals.
Yes.
We have rolled out, I would say, much of the core concepts of Choice. Dan called out one of those earlier in the call around the ability to pay with things other than your PayPal balance. As we have rolled those out, importantly, we're seeing consumer behavior on those really in line with how we expected that to play out from our prior testing around these things. Very much going as planned on that front. As we come into next year, we'll have some more of these things that we'll sort of layer in as we come into the first half of next year.
The core concepts around users being able to pay however they want and us not influencing them or requiring them to use things that were of our preference, those core concepts have been implemented and we're seeing consumer behavior as we would've expected from our prior testing around those things. Finally, I would just call out some of the really beneficial points around what we get from those. Access to tokens, instant withdrawals, those types of things we expect to have coming as we get into the first half of next year.
Yeah. I just add on that, Bill. I think there are a couple of things that we did get from Choice. Choice was a proactive strategic choice we made well before we started into negotiations with the networks. Actually, our move to Choice enabled us to open those conversations and to really start to think about how do we become allies with financial institutions and networks to drive digital payments together. I mentioned in my remarks the elimination of digital wallet fees and the cost certainty. Bill talked about tokens, and that allows us to move in a very seamless way into in-store environments. It also enabled us to have really the equivalent of what you would think of as card-present rates coming into the in-store environment. It's a profitable way for us to move into the in-store environment.
The other thing, we obviously got some network discounts on top of that, as well as instant access to funds when somebody is trying to remove funds from their PayPal account to their bank account. That was an important value proposition gap that we had, and we saw in other countries like the U.K., where we do have that today, that people actually increase their balance on the PayPal platform when they know they can take that money off instantaneously. It's a little counterintuitive to what most people are seeing, but we've got a lot of experience and know-how in that.
Thank you for the color. Thank you.
You bet.
Our next question comes on line of Dan Perlin of RBC Capital. Your line is now open.
Thanks. I had a question about, and you kind of talked a little bit about it, but the engagement side of the equation. You've seen obviously numbers increase quite a bit. I'm wondering how much of it up to this point at least is really a function of this mix shift to different types of transactions. You talk about Venmo users obviously have much higher frequency. I want to parse that with the types of merchant relationships that you're now able to engage in. It would seem as though from the legacy business you were in with eBay, you didn't have a lot of frequency with those merchants. You might go to eBay a lot, but you didn't necessarily go to those merchants a lot.
The announcements you guys keep making seem like just the consumer proposition to go back to that same merchant seems materially higher. I'm just trying to think about how do those two, I guess, shifts drive the forward look. Thanks.
Yeah. I first start off that obviously eBay is a large and incredibly important customer to us, and we work really hand-in-hand with that team to try and drive as much business as possible through that partnership. Obviously, as we split apart from eBay, part of the premise of that was that as a truly neutral third-party digital payments platform, that we could partner with numerous merchants and retailers that might have seen the relationship that we had with eBay as competitive to them, that we wouldn't have been independent. I think a great example of that is Alibaba. We have been nurturing that relationship with them. We've done a couple of different announcements through the quarters. We started with wholesalers with them. Now really, AliExpress is the main marketplace of Alibaba. That's where really all of their merchants are.
We've already started with PayPal being a payment option on that. It's really a great example of it because we have great strengths outside of China with consumers. They have great strengths with merchants inside China. We're already a major cross-border player in the Chinese corridor. That match would never have happened had we not been an independent third party. That's happening with numerous retailers as well, especially as we expand our value proposition now to really appeal to a mobile-centric world that one retailer after another of all sizes are thinking about.
Yeah, and in addition to that, I would also add that while we have expanded reach with merchants, it's also the case that our core experiences, as Dan mentioned earlier in the call, things like PayPal One Touch with now more than 30 million consumers and active in 200 markets around the world, we're seeing increasing engagement from those consumers on our core products. Yes, we have new experiences like Venmo that are highly engaged, but we're also improving engagement on our core product. Interestingly, as you've seen some third parties validate, such as the comScore study that looked at PayPal conversion versus other new entrants to the market in standard checkout, our conversion is nearly 40 points higher than our nearest competitor, with us at 87.5% and the nearest competitor at 51%.
That's an example of our increasing relevancy with consumers as they move to mobile and are demanding more and more seamless experiences as evidenced by the higher conversion rate that we have. It is on multiple fronts that we're seeing that improvement in engagement. The core product itself, we are seeing great increasing relevance with our consumers.
Great. Thank you.
We have time for one last question from the line of Bill Carcache with Nomura. Your line is now open.
Thanks. I had a follow-up question on some of your earlier comments around issuer partnerships. Is it reasonable to conclude that part of the focus in your discussions is around not just existing PayPal customer TPV, but also aligning incentives and finding ways for both issuers and PayPal to benefit from the addition of incremental volumes from new PayPal customers? Just trying to understand how much focus there is in the discussions around the addition of new users beyond the existing base.
Yeah. Bill, great question. First of all, the networks nor PayPal would have done the deal that we did had we not already been speaking with issuers and had we not known that issuers were gonna be very favorably inclined to this. This wasn't sort of a one-two punch, where the first punch was the network deals and the second one was going out to issuers. These were many conversations happening simultaneously. I would say all of the conversations that we were having with issuers involved incremental volumes and incremental customers. There's not one conversation that's just about, well, let's just talk about the PayPal base that Sarah will talk about, the base that's within that issuer base. It is all about how do we increase volumes, how do we increase the adoption and the number of accounts utilizing PayPal.
Yes, Bill, that is pretty much the focus of the conversations that we're having with issuers.
That's perfect. Thank you. Appreciate your responses.
Yeah. Well, thank you for that question, and thank you everybody for joining us today. We really appreciate the time out of your busy schedules, and we look forward to speaking with you again in the near future. Thank you, operator.
This concludes today's Q&A session. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great afternoon.