Good day, ladies and gentlemen, and welcome to PayPal's 2nd 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. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms.
Gabrielle Rabinovich, Senior Director of Investor Relations. Please go ahead.
Thank you, Latif. Good afternoon, and thank you for joining us. Welcome to PayPal Holdings' earnings release conference call for the Q2 2016. Joining me today on the call are Dan Shulman, our President and CEO and John Rainey, our Chief Financial Officer. We're providing a slide presentation to accompany our commentary.
This conference call is also being broadcast on the Internet and 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 form a 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 form a 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 Q3 and full year 2016. 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 ks 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, July 21, 2016.
We disclaim any obligation to update the information. With that, let me turn the call over to Dan.
Thanks, Gabrielle. Good afternoon, everyone, and thank you for joining us on the call today. I'm pleased to say we had another strong quarter with our financial results at the high end of our guidance and in many cases exceeding our own expectations. And of course, we announced earlier a multi year partnership with Visa. But before I discuss our results, I'd like to point out that it's been 1 year since PayPal became a publicly traded company for the 2nd time.
In many ways, our listing last year was a full circle moment for PayPal. It allowed us to return to the core mission of our founders, the mission they were pursuing when they took PayPal public in 2,002. Even with the Internet in its infancy, they saw the opportunity for technology to democratize money. Today, our purpose is the same, but our opportunity is much greater with the digitization of money accelerating and the adoption of mobile devices continuing its rapid pace globally. PayPal's total addressable market has grown to include all of digital commerce and digital money, a $100,000,000,000,000 opportunity.
Today's announcement with Visa brings us closer to capitalizing on that opportunity. The mission of PayPal is clear. We're striving to become an everyday essential financial service for underserved customers. And for our merchants, we want to provide a full service solution and platform that enables digital commerce. We are making tangible and consistent progress towards achieving these twin goals, while consistently delivering strong financial performance.
I'm proud that Q2 was another strong quarter for PayPal both financially and strategically. Our partnership with Visa will help drive consumer choice and provide enhanced value to the larger payment ecosystem. But first, let's look at the financial metrics we delivered this quarter. We grew revenue at 19.5%, delivering $2,650,000,000 on the top line. Given the challenging comps from Q2 last year, this exceeded our internal forecast and guidance.
We processed 86 $200,000,000 in total payment volume, an increase of 29% and our merchant services volume expanded 36%. Our mobile payments volumes continues to accelerate, up 56% this quarter, accelerating for the 3rd straight quarter. And we hit a record of over 24,000,000,000 in mobile TPV in the quarter. In the last 12 months, we've added 19,000,000 net active accounts, finishing the quarter with 188,000,000 customer accounts transacting on the PayPal platform. And even as we add new active accounts, our transactions per account continue to expand, reaching 29 this quarter up from 26 a year ago.
We generated 495,000,000 dollars of free cash flow in the quarter, giving our business tremendous flexibility to continue to reinvest in our growth. In the 1st 6 months of 2016, we produced $1,100,000,000 of free cash flow on track to meet our guidance of more than $2,100,000,000 for the year. And finally, we delivered 0.36 dollars of non GAAP EPS versus our guidance of $0.34 to 0 point 36 dollars I'm proud of the PayPal team and they worked hard to deliver these strong results. I'd like to now spend some time talking about the partnership announcement we made today with Visa and the progress we are making towards enabling our strategy of being a true customer champion. Being a customer champion company is not just words for us.
In order to be a great company over the long term, we need to provide the very best experience for our customers. We believe that means giving our customers full choice and optionality in where they want to pay and how they want to pay. This change in our business model positions us to better serve our customers and it's fundamental to the long term growth and success of PayPal. While we expect this to drive incremental expense, we now have evidence to support the assertion that customer choice will benefit both our business model and our customers over the medium term. Our improved onboarding experience, which we began rolling out last quarter, gives customers more choice when opening a PayPal account and has already resulted in lifting our activations.
In the coming quarters, we will be rolling out account setting and checkout experiences that also deliver enhanced customer choice. We believe these new experiences will result in improved engagement and a reduction in customer churn, all very good things for both our customers and for PayPal. But we are already seeing another significant benefit. By making customer choice a priority for PayPal, we are opening up new opportunities for partnerships within our ecosystem. Today, PayPal and Visa announced a strategic partnership to further expand our long standing relationship.
This agreement will allow both companies to offer greater choice to merchants and consumers and increased value to Visa issuers and PayPal customers. The benefits of this partnership include our ability to gain access to Visa's tokenization services, starting in the United States for in store PayPal transactions. This will allow customers to pay with their Visa instruments in the PayPal wallet at the millions of retail locations where they see the Visa contactless logo. Importantly, retailers can expect to pay fees that are consistent with other contactless transactions
they accept today.
We will provide greater accessibility for Visa payment instruments in the PayPal digital wallet. PayPal will also provide Visa, their issuers and their cardholders additional visibility into each Visa funded transaction, providing greater transparency and enhancing payment system security. The agreement affords PayPal certain economic incentives, including Visa incentives for increased volume and greater long term Visa fee certainty and removes the threat of any targeted pricing actions. This deal has the potential to be transformative for PayPal, Visa and the industry. We believe it provides us the flexibility and the capabilities to execute against our customer champion vision, to partner with issuers and others who share our vision and to accelerate PayPal's in store access in new and profitable ways.
We also believe it provides more options for growth and the ability to partner with others to mutually cross sell our various current and projected services to consumers and merchants around the world. All of these will take some time to come to fruition, but this agreement opens up a new chapter for PayPal. Giving customers choice in how and where they want to pay provides a pathway over the long term from our goal of 2 transactions a week from our current engagement of just over 2 per month. It's also important to say that we welcome the opportunity to work with more partners like Visa who share our vision and we are in discussions with a variety of players in our ecosystem. This is a new PayPal, one that is actively partnering across the digital payments landscape.
For example, in the quarter, we also expanded the European rollout of the Vodafone wallet we talked about last quarter. Consumers in Spain and Italy can now tap and pay in stores with PayPal and Visa, another example of how PayPal is opening our platform to a slew of new partnerships. Our partnership with Facebook continues to expand as do our efforts with Google, Pinterest, Alibaba and eBay. I'm pleased with the quarter's results, but we still have much to execute through the back half of the year. We need to continually innovate and deepen customer engagement in order to maintain and further widen the distance between our value proposition and that of our competition.
And in keeping with that focus, Q2 saw significant progress in consumer and merchant engagement on the PayPal platform. We are making steady strides in our efforts to become an everyday essential financial service for underserved customers. In the Q2, transactions per account increased to 29 and we processed 1 point 4,000,000,000 transactions, a new milestone for PayPal and an increase of 25% from the same period last year. Deepening consumer engagement is no accident. It is driven by our innovative products and an increasingly robust platform designed with our customers and their needs in mind.
Our aim is to deliver transformative products that make payments easier, faster, more reliable and more secure online, in mobile, in app and in store. One Touch, our contextual commerce services, Venmo and Zoom are all perfect examples of this. One Touch is the most rapidly adopted product in PayPal's history. As of the second quarter, over 25,000,000 consumers have opted into OneTouch and I'm pleased to say that we now have over 2,000,000 merchants offering this innovative way to pay. With the market leading 87% conversion rate, We continue to see increased engagement and conversion with the use of OneTouch.
We're continuing to invest and innovate in contextual commerce. Last year Pinterest launched its first foray into viable buttons. Braintree powered 80% of the Pinterest launch merchants. Building on this infrastructure, we are now powering Pinterest new shopping bag functionality that lets shoppers pick items from across the web, collect them in a shopping cart and make a single purchase. This brings over 10,000,000 unique products to Pinner's for an even richer and more convenient in context shopping experience.
And Venmo continues its rapid growth. In the quarter, Venmo processed almost $4,000,000,000 in P2P payments, an increase of 141% year over year. We are very focused and making steady progress with our Pay with Venmo pilot. We have added 8 more next generation apps beyond Muncie and GameTime. These include Parking Panda, Priv, Wish, Box, Hot Market and Poshmark.
We have also further expanded the Venmo pilot from 1,000,000 to 3,500,000 Venmo users. We expect to add many more merchants and all of the Venmo consumer base later this year. Zoom's U. S. Customers can now send money to loved ones in 53 countries and it continues to redefine global remittances through mobile technology, ending the quarter with more than 70% of transactions originating on a mobile device.
We continue to see the benefits of our integration efforts with Zoom adding more than double the number of net new actives this quarter versus a year ago. I'm pleased to say we are executing on our acquisitions business case and I have high hopes for what Zoom can offer to PayPal consumers in the years ahead. All of these innovative new experiences are driving PayPal's leadership in mobile payments. As I mentioned PayPal processed over $24,000,000,000 in mobile payment volume, an increase of 56% year over year and mobile now represents 28% of our total payment volume, up from 26% in the first quarter. Mobile is arguably the most competitive arena in the digital payments ecosystem and PayPal continues to widen its lead and gain share.
2 quarters ago, we grew our mobile volumes 45% year over year, last quarter 54% and despite a substantially increased base of mobile transactions, we grew 56% this quarter. We also continue to make substantial progress in acquiring new merchants and now have more than 14,500,000 merchants transacting on our platform. Our increasing ability to provide a suite of innovative services for merchants is not only accelerating our competitive differentiation, but enabling us to be seen as a true full services payments partner. PayPal's merchant services payment volume was $71,300,000,000 in the quarter increasing 36%. Leading merchants continue to choose PayPal, including IKEA in multiple countries, the world's leading cruise brands of Carnival Corporation, including Carnival Cruise Line, Princess Cruises, Holland American Line and Seabourn Russia's VKontakte, Europe's largest social media network with 360,000,000 users, women's fashion brand Talbots, Cafe Pacific and Eventbrite, the world's largest self-service ticketing platform has now launched with Braintree Full Stack Processing.
And Braintree continues to gain momentum rapidly adding new merchants ending the quarter with 309,000,000 cards on file, an increase of 101% from the same period a year ago. Finally, PayPal working capital continues to be an important way we engage our small business merchants and support their growth. In Q2, we exceeded $2,000,000,000 in originations since our launch. We've now funded more than 90,000 small business merchants in the U. S, U.
K. And Australia. Our working capital merchants see an almost $0.50 increase in payment volume for every dollar of working capital extended to them by PayPal, clearly a powerful tool for our merchants. Finally, I'd like to mention a few accolades we've recently received that highlight the strong progress we've made in the past year as an independent company. First, our financial performance has earned us a place on the Fortune 500 list at number 307.
Importantly, we are now being recognized for our leadership in innovation. Recently, InformationWeek named PayPal the number 11th company in the country in terms of technology innovation. And the value of our brand is also on the rise. The Financial Times recently came out with the Brand Z listing of the top 100 most valuable global brands. PayPal was one of the top 10 brands that increased its value most in 2016 gaining 35% and rising from number 88 to the 65th most valuable brand across
the globe.
And finally, and perhaps most meaningfully to many of us, consumers in the United States recently ranked 180 top brands across the world in terms of social impact and doing the most good in the world. PayPal was ranked among the top 5 companies across the globe. We've made strong progress in the 12 months since becoming public. We have a lot of work ahead of us, but the opportunities are coming into sharper focus and are now clearly within our reach. We remain focused on executing with both discipline and excellence for our customers and for our shareholders.
I'd like to now turn the call over to John. John? Thanks, Dan.
I also want to thank all of PayPal's customers and our employees worldwide for making this another great quarter. Q2 marks another quarter where we advanced our goal of becoming a central part of our customers' daily financial lives, strengthened our position in the ecosystem and enhanced our value proposition as a customer champion company. First, I will walk you through the highlights of our 2nd quarter results. On a currency neutral basis, total payment volume was $86,200,000,000 an increase of 29%. U.
S. Payment volume grew 27% and international volume grew 31%. Our merchant services business grew 36%, demonstrating that our strategy of being a customer champion and moving from being a payment button to an end to end payment solution for merchants of all sizes continues to gain traction. We ended the quarter with 188,000,000 active accounts, an 11% increase from a year ago. Account growth was predominantly driven by our PayPal core offering followed by Venmo.
The number of payment transactions per account increased to 29, up 13% year over year and an acceleration from the Q1. This, when combined with the increase in active accounts, contributed to payment transaction growth of 25% year over year. In the second quarter, we generated revenue of $2,650,000,000 up 19.5 percent on a currency neutral basis and 15.6% on a spot basis. Q2 revenue exceeded our expectations as a result of strong performance in our core business and Braintree. In the Q2, we faced difficult year over year comparisons from the amendment of our Synchrony co branded credit card agreement and the sale of a portion of our credit receivables portfolio last year, as well as a larger currency hedging gains in Q2 2015.
We are pleased with our very strong top line performance and our ability to offset these year over year pressures. Transaction revenue increased 23% on a currency neutral basis in the quarter, an acceleration from the Q1. Performance was driven by large merchant growth in our core business and strength in the Braintree business. This resulted in a transaction take rate of 2.69% for the 2nd quarter, a decline of 22 basis points year over year. The decline was primarily driven by lower currency Cajun revenue in the quarter versus last year, the growth of our P2P business, including Venmo and the mix shift towards Braintree and larger merchants.
Revenue from other value added services was flat versus last year, driven by the amendment of our Synchrony agreement and the sale of our credit receivables in Q2 of last year, offset by solid results from our credit products. Transaction expense and transaction and loan losses, our volume based expenses, increased 28%, in line with total payment volume growth. This resulted in a transaction margin of 59.8% versus 63.8% in Q2 2015. In the quarter, on a year over year basis, the transaction margin decline was driven primarily by strong performance from Braintree, which has a lower take rate and higher transaction expense, the lapping of the amended Synchrony agreement and the sale of a portion of our credit receivables and the high margin hedge revenue we recognized in Q2 2015. Other expenses grew 10%, well below revenue growth and drove 185 basis points of leverage.
Excluding the acquisition of Zoom,
our other expenses increased approximately 7%, demonstrating good cost control. We continue to be focused on strong expense discipline. The scale of our platform allows us to carefully manage the growth of these other expenses, even as our revenue grew nearly 20% on a currency neutral basis. We continue to see opportunity to manage these costs over time. We delivered operating income of $528,000,000 in
the 2nd quarter.
For the first half of twenty sixteen, operating income increased 10% to $1,100,000,000 Operating margin for the 2nd quarter was 19.9%, a decline from last year, predominantly driven by the items I already mentioned affecting revenue, the amendment of our Synchrony agreement and the sale of our credit receivables, both of which dropped directly to the bottom line. We were also impacted by the acquisition of Zoom, which was approximately 40 basis points. But excluding these items, operating margin would have expanded approximately 100 basis points year over year. We generated non GAAP EPS of $0.36 per share for the quarter, the top end of our guidance range. For the first half of twenty sixteen, non GAAP earnings per share increased 19% to $0.73 2nd quarter capital expenditures were $201,000,000 or approximately 8% of revenue.
Free cash flow in the 2nd quarter was $495,000,000 representing $0.19 of free cash flow for every dollar of revenue. During the quarter, we also returned approximately $300,000,000 to shareholders by buying back an additional 8,000,000 shares. Year to date, we have returned approximately $900,000,000 to shareholders, repurchasing 25,000,000 shares at an average price of $36.34 We ended the quarter with cash, cash equivalents and investments of $6,200,000,000 including approximately $1,300,000,000 in the U. S. I want to take a few make a few comments regarding the UK's vote to leave the European Union.
First, we should acknowledge that we are in the very early days and exactly what happens from here will take some time to unfold. Europe generally and the UK specifically are very important parts of our business that we will continue to serve. In the Q2, approximately 12% of our revenue was generated in the UK. Because of the global nature of our business, we typically see a counterbalance effect when any one currency measurably weakens or strengthens. This is particularly pronounced in certain corridors like the U.
S. And Canada and the UK and the EU due to proximity and consumers' awareness of currency shifts. In the medium term, we're obviously going to keep a close eye on the broader economic environment and any effect on customer behavior. From a foreign currency standpoint, the euro and the pound are the 2 currencies where we have the most exposure. For that reason, we hedge both currencies and our exposure from a translation perspective in 2016 is minimal.
Importantly, our EU business is operated through our Luxembourg bank, where we are allowed to passport our banking license among the EU member states. The UK's decision to exit the EU will have some impact on the regulatory framework under which we operate. We have been assessing the ramifications of a lead vote
since
the referendum was announced. And once we have better clarity on how the relationship between the UK and the EU with respect to financial services will be governed, we will take the necessary steps to be able to continue to serve our customers in the capacity that we do today. Now I'd like to give you an update on our credit portfolio. Our credit products support and complement our platform, enhancing our digital payments offering for both our consumers and our merchants. Credit drives a positive network effect for our business, increasing volume and engagement on our platform.
Credit represents approximately 2% of our TPV. And in the medium term, we expect the TPV contribution from our credit products to remain around this level. In addition, as we've said previously, we continue to assess asset light strategies to fund and grow our credit offering. The performance of our credit portfolio continues to be in line with our expectations. In the Q2, we saw improvement in our delinquency rates and most of our other credit quality metrics.
We have, however, experienced a higher percentage of our late stage delinquent consumer credit balances rolling to charge off. This has resulted in a charge off rate of 6.3% versus 6.1% last quarter. We attribute the increased charge offs to changes in our own collection efforts that were recently instituted. We've taken steps to address this impact in the back half this year. As Dan mentioned, our agreement with Visa and more broadly, our strategic decision to invest in customer choice is a great opportunity for our customers, our shareholders and other partners in the payments ecosystem.
This partnership will help drive the digitization of payments both in mobile and in store. Much has been made about the blurring of the offline and online worlds through digital payments. The agreement with Visa is an important step allowing us to more fully participate in this powerful secular shift with our mobile first strategy complemented by Visa's in store strengths. We have an expansive vision for PayPal, including being an everyday part of our customers' financial lives. Customer choice, as we refer to it, involves empowering our customers to use PayPal where they want to pay and how they want to pay, and is the vehicle for achieving that vision.
For the remainder of 2016, we do not anticipate any material impact to our results from the movement to Choice. Beginning next year, we expect the changes to our funding mix from Customer Choice will increase transaction expense. But at the same time, we believe expanding customer choice will unlock future revenue opportunities. Moving to customer choice and our agreement with Visa laid the foundation for sustainable revenue growth with more certainty in our cost structure. It's very early on and we're only 6 months through the year.
As we get closer to year end, we will provide more detail on the impact of this and how it affects our 2017 performance. Finally, I'd like to discuss our financial guidance for the Q3 and full year. Our strong performance in the first half of the year across our core business Braintree and P2P, in addition to our growing mobile penetration, further validates our strategies and our business priorities. As a result, we are raising our full year 2016 revenue guidance to $10,750,000,000 to $10,850,000,000 or 19% to 20% growth on a currency neutral basis. We are also narrowing the non GAAP earnings range to $1.47 to $1.50 per share, representing growth of 18% at the high end of the range.
And we are reaffirming our full year prior 2016 guidance on free cash flow, CapEx and non GAAP effective tax rate. For the Q3, we expect revenue in the range of $2,600,000,000 to $2,670,000,000 or 19% to 21% growth on a currency neutral basis. And we expect non GAAP earnings of $0.33 to $0.35 per share. In conclusion, our 2nd quarter results demonstrate the continued progress we are making in our business. Revenue is strong and we are combining that with excellent cost control to generate healthy margins and strong free cash flow.
We continue to allocate capital in a way that generates shareholder value. And our partnership with Visa has removed an overhang on our business, giving us greater cost certainty going forward, allowing us to profitably participate in the offline market and creating the foundation for being a customer champion. With that, I'll turn it over to the operator for questions. Thank you.
Thank Our first question comes from the line of Tien Tsin Huang of JPMorgan. Your question please.
Thanks. Good afternoon. Congrats on the Visa deal. I was curious, can we still rely upon your midterm guidance after considering the Visa partnership? I know there's a lot of moving pieces obviously, but curious if the midterm guidance still applies.
Thanks, Ingen. I appreciate it. This is John. We'll update that if it's appropriate as we get closer to the year end. Like I suggested in my prepared remarks, we're very early on into this.
We're very encouraged by the agreement. We think it's a fantastic opportunity for PayPal and it's likely to possibly affect the way our financial outlook into the future, but we're not prepared to update that at this time.
Thank you. Our next question comes from the line of Heath Terry of Goldman Sachs. Your question please.
Great. Thanks. On the part of the Visa agreement around contactless payments and the enablement of offline acceptance, Can you give us a sense of what the process is going to look like for that Visa mentioned on their call that you still have to get sort of approval or from the financial institutions, from the merchants. How do you intend to kind of get more out of this enablement than we saw out of the Discover deal? And what's the roadmap look like to get there, particularly from a timing perspective?
It's Dan. Thanks for your question. So we're very excited about the partnership with Visa. I think it's very important to understand that I think as Charlie said on the Visa call, partnerships like the one we announced today work best when there's alignment for everyone. And we believe that we've designed an agreement that works for PayPal, Visa and the issuers.
We have been in discussions with issuers. Visa has been in discussion with its issuers and they're excited about the benefit from the volumes that we can bring to them and that we can bring to point of sale. And as Charlie pointed out, this agreement removes many of the concerns, if not all of the concerns that issuers and others in the ecosystem has about working with PayPal. Choice is something that everybody has been talking about. What issuers want, what we want is the ability for a consumer to make a choice to have options as to what payments tender type they want to pay with.
What that basically means is that a consumer could pay with their credit, with ACH, with debit, with cash, with P2P, with PayPal credit, any of those, but it's the option of the consumer to make that choice. And then when you add on top of that optionality, the fact that we are very, willing and happy to share the same source of data that somebody would get with a typical credit card swipe back to the networks, back to the issuers and to customers. That's exactly what issuers have been asking for. We actually think that this deal that we have with Visa offers a couple of benefits. Obviously, it offers access to tokens at rates that are comparable to other contactless methods out there.
And so we can compete with anybody now at point of sale. There's no competitive disadvantage to anybody else out there and we can go offline profitably. 2nd, we get fee certainty as we talked about no targeting targeted actions against PayPal limits on new fees, even industry based fees and volume based discounts. So we have certainty around our cost structure. And very importantly, I think this opens us up to new partnerships, new partnerships with issuers, networks and others.
Choice and data turn us into their friends. And when I think about the partnerships that we have, we're an ideal distribution mechanism to drive more online and mobile spend to issuers. They're an ideal partner to drive incremental net adds and customers into the PayPal platform. That's a win win for both of us. And this is going to open up a new chapter for PayPal to partner with, and for all of us to work together to advance digital payments going forward.
And as I mentioned in my remarks and John mentioned, Choice also is going to help us drive incremental new net adds. We're already seeing that in some of the changes we've made to our onboarding. When you look at One Touch and you see what our customers do when they're able to default a payment mechanism, their engagement goes up, their conversion rates go up. And obviously, when a customer gets to choose what instrument they want, we're going to see less calls come into customer care for us, we're going to see customer satisfaction go up and typically when that happens, customer churn goes down. So we think this is a very strong agreement that benefits Visa, its issuers and us allows us to work within the ecosystem.
And the issuers don't need to sign any unique agreements with us. It's simply an opt in to participate with us. It's no additional work from them and our movement to choice data sharing plus our commitment to quality, I think puts us on a par with others are using Visa tokens in the ecosystem.
Great. Thanks, Dan.
You bet.
Thank you. Our next question comes from the line of Lisa Ellis of Bernstein. Your line is open.
Hi, guys. Good afternoon. So one just follow-up question then on the Visa arrangement around activating at the point of sale. How in those in that scenario, do you guys remain the merchant of record? And does it flow over your acquiring platform?
Or is the construct more of a pass through wallet, as that's envisioned?
For the point of sale, we would do kind of pass through on the token level, so that there'd be transparency on that. We've always said that we are perfectly willing to use the industry tokens and do that on a pass through basis. And this agreement allows us to do that. It allows us, 1, to approach merchants with rates that are comparable to any digital wallet that are out there. So this whole card not present, card present rate structure that people have talked about, this takes away that concern as well.
So it's an agreement that our 2 teams spent a lot of time working with, a lot of time making sure that the issuer population was also comfortable with it. And we think it is a really a tremendous win for all the parties on that.
Got it. And on those transactions, sorry, just to clarify though, it's still processing over your acquiring platform?
It is.
Right. Meaning like the merchant will be paying you directly their typical take care. That's correct. Okay. Terrific.
Thanks guys.
Yes.
Thank you. Our next question comes from James Friedman of Susquehanna. Your question please.
Hi. I was going to pivot out of the Visa conversation and ask you about Braintree. I think in the past, Dan, you've disclosed or discussed at least some of the backlog in Braintree. I was wondering if you could update us, if that quantitatively, what does it take to actually activate the merchant from the backlog from a Braintree perspective? Thank you.
Yes. So we're making very good progress in terms of our ability to work through the large demand that we have for Braintree. In effect, we try to make it as easy as possible on a merchant. We have API sets that makes it easy to integrate. It really depends on the extent of the integration that we're doing in any of the customization that we have to do.
But I'd say we're making really good progress on keeping up with the demand right now. The demand is strong, as John mentioned. It's why we're part of the reason why we're taking up our revenue forecast. But I'm really pleased with our ability now to onboard those customers and bring them live to site. Thank you.
Yes.
You. Our next question comes from George Mihalos of Cowen. Your line is open.
Great. Thanks for taking the question guys. I was wondering if you can give us a rough sense how much of your TPV now goes through the Visa network, both on a credit debit perspective. And I just want to be clear, there is no initial incentive that is going to be provided to that volume starting day 1, right? You'll have to go negotiate that with the issuers.
We have volume based incentives from Visa themselves. There are also other potential terms that we could do with issuers specifically.
Your first
question was?
How much volume is on Yes. And that's not something we'll disclose, but maybe George, I can give you a construct or a framework to kind of think about this because I understand why you're asking the question. If you consider we have just rough order of magnitude $300,000,000,000 of TPV today, and if you were to look at a funding shift on that, that would overstate the effect of a funding shift because this agreement for now is U. S. Only.
And as we've disclosed in the past, that's roughly half of our TPV. We also see differences in funding mix between P2P versus goods and services. So you've got strip that out or at least treat that differently. And we disclosed earlier this year that P2P is roughly $40,000,000,000 of our annual TPV. And then lastly, you need to also consider that there's a large percentage of our customers today that only have a card in the wallet.
So choice for them, there'd be no other increase in cost by moving by adding additional car or doing a different car. So from the cost side, that's the right framework to think about this.
Okay. Great.
That's all right.
I'd also add to it George. Remember, this is about optionality. So all tender types will be presented to the customer for them to choose the tender type that makes the most sense for them for that particular purchase. And we've seen that that is a beneficial thing when we offer customers that ability.
Yes. Even the early stages of testing some of these experiences with customers, we see really encouraging signs just in things like customer activation, where you remove some of the friction from that process. And as Dan alluded to earlier, OneTouch has been a great test bed for us as we've seen pretty dramatic increases in engagement after someone activates there.
Okay, great. And just a quick follow-up. John, I think you talked about taking some steps on the PayPal credit side to maybe mitigate some of the increases that you've seen in charge offs. Can you elaborate on that, what that might mean for the back half of the year?
Sure. So as Dan talked about on the call last quarter, since we've become an independent company, we've really tried to establish ourselves as at least aspiring to be best in class when it comes to compliance. We think that that's really important for us. That's as part of being a customer champion. And so we've taken steps across every aspect of our business to improve our compliance.
And so specifically, we changed some of the ways that both we contacted customers as well as the repayment options for credit that had some effect that on the late stage delinquencies. There are other methods that we can do to mitigate that impact and we're filling ourselves with those options for the back half of the year.
I would also just say, as John mentioned, we're seeing some improvements in the underlying credit quality of our base delinquency write offs on that. So it's just that one particular bucket that we saw an increase and so we're taking actions to address that. But in terms of the overall portfolio, we're very comfortable with what we're seeing on that.
Yes, if I can just add maybe a little bit more color to that. Our total delinquencies were actually down year over year. When we look at the percentage of our portfolio, it's rated prime or above, that grew by a point, a better credit quality year over year. The 90 day delinquency is down year over year. And our portfolio FICO score is relatively flat with where it's been.
So it's look, we're very keen on all the concern around this with other players in the ecosystem and we're aware of that. So it's something that we're hyper focused on.
Okay, great. Really appreciate the color.
Yes, you bet.
Thank you. Our next question comes from Ashwin Shirvaikar of Citi. Your line is open.
Thank you. Good afternoon, Dan, John. Congratulations on getting the deal done. Two separate questions. On the Visa related customer choice, when you say no impact in 2016, Is that indicative of your view as to how long it might take to implement specific deals with issuers?
I guess it's the first question. And the second is with regards to how does the agreement affect your relationship with merchants? And I guess, your weighted average funding cost is an important part of the discussion, but not the only factor. If you could comment on those.
Yes. So in terms of our guidance for 2016 incorporates any impact that there might be from customer choice. But you're right, this takes some time for this to be implemented and to move forward. And so our guidance incorporates any impact that there might be from customer choice. And as John mentioned, we will wait until we get closer to 2017 to give 2017 guidance.
First of all, obviously, we'll take a look at consumer behavior as a result of this. There are a number of discussions going on in the ecosystem and we want to look at the totality of the landscape before we really talk about what 2017 could look like. And finally, we're halfway through the year. We've got a full another 6 months to execute against and let's see how our momentum takes us before we provide 2017 guidance. And on the merchant side, merchants have been working with us quite closely as we're creating a platform for them to take advantage of digital commerce.
And that basically means letting a merchant write their own application and we power that application through a platform that enables them to extend a value proposition to their customers online, on mobile and in store. And part of that in store environment, when it comes to the PayPal wallet, we did not have tokenization schema. We could use different forms of that. And so from a merchant perspective, the rates now that we can offer on an in store point of sale transaction are significantly more competitive for them. And so it just strengthens our position in terms of working with merchants.
No change in our strategy, but certainly strengthens it and opens up a wide opportunity for us as we talk about the blurring of online and offline coming together, this really opens up our ability to move into any context, whether it be online, in app or in store with our digital wallet.
Okay. I guess a quick follow-up, if I may. In terms of the offline choice, how is Paydient affected by this, if it is?
Yes, great question. Paydient is not impacted all. Paydient is part of our fundamental underlying platform. So when you think about the piece parts that we've started to put together, we had PayPal that was obviously very strong in online market Braintree extremely strong in the mobile and in app marketplace and Paydient very strong in the in store environment. And so all of those are now coming together and being integrated so that we can offer merchants the ability to look across any of those contexts and use our platform to power and enable their move to digital commerce.
Then what we've done obviously is because our base is so large, we take our branded PayPal wallet, which now is available to go into more context as I just mentioned and light up those applications, because we have so many subscribers that we can bring, to those merchants. And so you've got a platform play that's really unbranded that supports a merchant's move into digital commerce and then a branded wallet. And this helps us with our branded wallet to move into that offline space.
That's great. Thank you for that information.
Yes. You're welcome. Operator, I think we have time for one more question.
Yes, we do, sir. That question comes from the line of Bill Karkash of Nomura. Your line is open, sir.
Thank you. Dan, there's promote their brands on PayPal during the exclusivity period? And maybe give a little more color on what the receptivity has been in your discussions with the large issuers? And finally, what your confidence level is that you'll be able to get some of them on board?
Yes. So we have a high degree of confidence in that, Bill. We haven't worked this agreement in a vacuum nor has Visa worked it in a vacuum. We've obviously been working with the issuer community. We've obviously been in very close communications with them.
We've been in close communications actually throughout the whole payment ecosystem with quite a number of players. And this move towards choice, our ability to open up our data, is something that issuers have been asking us for, for quite some time. I think they are based on our conversations, conversations that Visa has had with its own issuers and we've been a part of some of those. There's a lot of excitement about the ability to partner and work together. We think we can be a very strong distribution channel for them.
You've talked about that in some of your write ups and that's exactly the vision that we are moving towards and we have a good degree of confidence around that.
Thank you. If I may, a follow-up for John. John, I believe that you made the point at Investor Day that the increase in your transaction expense rate from the shift to consumer choice would be something that you could offset with the operating leverage inherent in the business. Given the partnership announcement and all the different aspects to it, I guess, you guys are saying tonight that that doesn't necessarily still hold. You'll reevaluate over the next couple of quarters when you give 2017 guidance, say whether that's still the case or just trying to get a sense of the, I guess, applicability of that statement still?
Yes. So that's not entirely correct. But just talking directionally, we have I would describe this as very analogous build to like an investment that one would make an acquisition, for example, where there's perhaps an upfront cost, but there's a revenue stream that more than offsets that to where it's very accretive to the business. With respect to the increase in transaction expense, we'll give more specific guidance as we get towards the end of the year about 2017. But when you look at both the revenue benefit as well as the good demonstrated cost control that you've seen for several quarters now.
And just look at the over 180 basis points of leverage this quarter, the fact that our operating expenses, if you normalize for the Zoom acquisition, only went up 7% in the quarter. We can continue to demonstrate that we have a laser focus on discipline here, while still not starving the business for investment as well. We're making sure that we're continuing to invest organically. So all that combination gives us a level of comfort with this, but it's absolutely the right thing to do for the business. But specific to 2017, we'll give you a heads up on that towards year end.
Great. Thank you for taking my questions.
You bet. You bet. Thank you. Okay. Thank you everybody for joining us today.
We really appreciate your time. And operator, that will conclude our Q and A session. Thank you.
This concludes today's Q and 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 evening.