John Rainey
Chief Financial Officer and Executive Vice President, Global Customer Operations at PayPal
Thanks, Dan. I'd like to start off by thanking our customers, partners and employees for helping us deliver an outstanding year following our record-breaking performance in 2020. There are several important points that I want to discuss today. I'm going to discuss a pivot in our strategy to focus more on engagement and what that means for our net new actives going forward. I also want to discuss why we are taking a more conservative outlook for 2022 for both revenue and earnings. And lastly that we don't believe either of these items will prevent us from achieving the revenue and earnings growth rates, along with our free cash flow objectives in the out-years of the period contemplated in our medium-term guidance.
But first, I want to spend a moment discussing our Q4 performance. 2021 certainly had its ups and downs, but when one steps back and looks at our overall performance, it was really an amazing year. TPV grew 33%, revenue grew 18%, and we generated $5.4 billion in free cash flow. We also added 49 million customer accounts, ending the year with 426 million. And our engagement metric, transactions per active account grew 11%, an acceleration of approximately 10 percentage points from 2020. Remarkably in 2021, growth on our platform, excluding eBay accelerated meaningfully on top of extraordinary performance in 2020. TPV growth accelerated more than 500 basis points to 38%, and revenue growth accelerated more than 600 basis points to 29%. Since 2019, our volumes ex eBay have nearly doubled, and overall, we've consistently grown volumes well ahead of industry growth rates.
We also advanced our leadership position in checkout. Since the start of the pandemic on average, our share of checkout among the largest publicly traded merchants has increased by nearly 200 basis points. Further, in the U.S., consumer adoption of our digital wallets is several times higher than the next nearest wallet. And our merchant acceptance leads all other checkout buttons by an even more sizable margin. By any measure, we are a leader in digital payments. There are only a handful of companies that generate the amount of revenue and free cash flow growth that we do annually. And we are confident that our long-term market opportunity is greater than ever. In the fourth quarter, total payment volume grew 23% to $340 billion. eBay volumes in the quarter declined 45% and represented 2.7% of total volumes versus 6% last year.
And excluding eBay, volumes grew 28% on a currency-neutral basis. Revenue in the quarter increased 13% to $6.9 billion. Revenue ex eBay grew 22%, which is two points ahead of our medium-term growth outlook. This strong performance was broad-based across Braintree, Venmo, core PayPal and our credit products. Relative to the fourth quarter of 2020, U.S. revenue grew 27% and international revenue decreased 1%. Supply chain shortages and eBay's transition adversely impacted cross-border volumes and foreign exchange fees. Ex eBay, International revenue grew 11%. Importantly, on a currency-neutral basis, the two-year compounded growth rate for revenue in the quarter remained consistent with the fourth quarter of 2020, underscoring the strength and consistency of our business. In the fourth quarter, total take rate was 2.04% and transaction take rate was 1.88%.
Notably, both increased sequentially, reversing an approximately two-year trend of sequential take rate declines, both product mix and pricing benefited our performance. In the fourth quarter, our volume-based expense performance was strong. Transaction expense increased three basis points as a rate of TPV to 87 basis points, driven by volume mix, particularly our growth in Braintree volumes and Q4 seasonality, which increases credit card mix relative to other funding instruments.
Transaction losses improved one basis point to nine basis points, which matches the best performance we reported in our history. Credit losses were one basis point as a rate of TPV versus three basis points last year, driven by our mix of originations, portfolio performance, and $9 million in reserve releases. At the end of the quarter, our credit loss reserve coverage ratio was approximately 9%. In total, we released $312 million of reserves in 2021. Transaction margin dollars increased 6% to $3.6 billion and ex eBay grew 18%. Transaction margin as a rate declined 365 basis points to 52.3%, and our non-transaction related expenses grew 10% in the quarter.
On a non-GAAP basis, operating income was flat in comparison to last year and operating margin declined 291 basis points to 21.8%. Non-GAAP earnings per share were $1.11. We ended the year with cash, cash equivalents and investments of $16.3 billion. In addition, free cash flow increased 38% in the fourth quarter to $1.6 billion, and we repurchased $1.5 billion of stock in the quarter. I'd now like to discuss our net new accounts and provide more context for our performance and our expectations for 2022. For the quarter, our guidance contemplated generating about 12.9 million net new actives on an organic basis. We had a slower than expected finish to the year and came in below our target. There are three factors that contributed to this, which I will discuss in increasing order of magnitude.
First, the more muted end to the year for eCommerce growth driven by both supply chain challenges, as well as pullback in spending by lower income consumers affected consumer growth. Second, in the back half of the quarter, we also changed course on some of our customer acquisition strategies, including incentive-led campaigns. And lastly and most impactful to the quarter, there were certain accounts that we disqualified or excluded from our net new active number. For context, we regularly assess our active account base to ensure the accounts are legitimate. This is particularly important during incentive campaigns that can be targets for bad actors attempting to reap the benefit from these offers without ever having an intent to be a legitimate customer on our platform. In the fourth quarter in connection with the increased use of incentive campaigns throughout 2021, we identified 4.5 million accounts that we believe were illegitimately created. This number is immaterial to our overall base of 426 million customer accounts, but it affected our ability to achieve our guidance in the quarter.
Now I want to shift to how we're thinking about net new active accounts in 2022, which is separate and apart from the factors impacting Q4. I'm going to start with the headline here and then provide some explanation. We are evolving our customer acquisition and engagement strategy, and we now expect to add 15 million to 20 million net new customer accounts this year. In addition, we no longer believe that the 750 million medium-term account aspiration we set last year is appropriate. I'll explain. Over the past two years, we've added more than 120 million customer accounts to our platform. This is without question, remarkable growth, and a complete step change from our trajectory prior to the pandemic. Our strategy for this has been two-fold, continue to add net new actives and increase the engagement of our customer base.
Last year, given the strong user growth, we pursued a strategy to retain those customers most likely to churn, as well as attract many more new customers. We also leaned into incentivized customer acquisition tactics to a much greater extent than we ever have in our history. At the same time, we've continued to focus on and invest in areas that deepen our engagement with our customers, particularly as we continue to add new products and services. To assess the effectiveness of these strategies, we look at the impact on customer behavior in the months that follow account creation, in essence, looking at the ROI or return on that investment spend from their expected contribution to TPV, revenue, and operating income. These programs are very successful in generating account creation, but overall, these customers have lower engagement and a higher propensity to churn and have not met our required level of return. This dynamic compounds over time as it requires increasing investment simply to keep minimally engaged users on our platform.
Similar to a lot of businesses, we have a Pareto dynamic in ours, where the vast majority of our volume comes from about a third of our customer base. What this means is that unlike a subscription model, where more users equates to more revenue, in our business, that relationship is much more attenuated. In assessing our marketing effectiveness, our engagement initiatives were considerably more successful than the incentive campaigns. We successfully moved customers up the engagement continuum into higher levels of engagement throughout the year. These strategies had strong returns and over time will be important contributors to achieving our long-term revenue per user objectives.
Moving forward, we will continue to grow our users, but our focus will be on sustainable growth and driving engagement. To be very clear, this is a choice on our part. We could increase our spend and accelerate our net new active trajectory, however, we believe there are better ways to achieve our financial results. We strongly believe that we are making the right decisions in redirecting our spend toward high-value customer acquisition and engagement channels. That said, over the next 12 months, as these less engaged customers naturally roll off, it will materially reduce our quarterly net adds. Over the next couple of quarters, we plan to supplement the disclosure of net new actives with the addition of monthly active unique user and ARPU metrics. These metrics have a more meaningful correlation with our financial results, and we believe this incremental disclosure will allow you to better assess engagement on our platform and the degree to which our strategies are working.
I'd now like to discuss our financial guidance for 2022 in the context of our fourth quarter performance and the initial outlook we provided in November. Overall, revenue performance for the quarter came in about how we had expected. October was a strong month buoyed by some expected pull-forward in holiday shopping, however, the back half of the quarter was weaker than we expected. Consistent with the reported sequential decline in seasonally adjusted retail sales and consumer spending in December, we experienced a softer end to the quarter.
The impact of Omicron and the effect of inflationary prices combined with lack of stimulus is having an impact on spending and by extension, our business. This impact is most pronounced on our lower income cohorts and has continued into the first quarter. The persistence of inflationary effects on personal consumption, labor shortages, supply chain issues and weaker consumer sentiment have led us to adopt a more cautious outlook. On last quarter's call, we preliminarily indicated high-teens revenue growth for this year, and said that if we had to pinpoint it, it would be around 18%. We have an incredible business, but we are not immune to the vagaries of the economy. Based on our more conservative stance today, we are starting the year with an expectation for revenue growth in the range of 15% to 17%.
If these issues do not improve, it could cause us to be toward the lower end of that range. Should we see improvements relative to what we're seeing right now, it could result in being toward the upper end of that range. The environment continues to be difficult to predict, and this guidance provides our best estimate of the likely range of outcomes. In addition, as we discussed when we reported our third quarter results, our earnings growth in 2022 will be constrained by lapping the release of the credit reserves and a very low effective tax rate last year. In 2021, we released $312 million in credit reserves. This benefited operating margin by approximately 125 basis points and earnings per share by $0.21. Our effective tax rate was 10.5% last year, resulting from favorable discrete items, settlements and resolutions, and benefited earnings per share by approximately $0.33 for the year. This is compared to an estimated tax rate of 16% to 18% this year. In the aggregate, these factors totaled $0.54 of EPS pressure year-over-year and represent a 12 point headwind to earnings growth this year.
At the same time, continuing to invest in innovation and our go-to-market strategies is essential. Over the last two years, we've invested nearly $1 billion over and above our historical spend in areas like engineering, technology, marketing and customer support, all of which have generated tremendous returns for us. This year we're focused on leveraging these investments, while continuing to innovate at scale, strengthening our competitive positioning and advancing our leadership in digital payments. Importantly, we expect to deliver solid leverage in our non-transaction related expenses in 2022, which will be offset by volume-based expense growth, predominantly related to our changes in our credit reserves. As a result, we expect operating margin to be in the range of 23% this year. And for the year, we expect to deliver $4.60 to $4.75 in non-GAAP earnings per share.
In the first quarter, we're up against our hardest comps, as we grew revenue 31% and non-GAAP EPS 84% in Q1 last year. The first half of last year benefited from stimulus, stronger consumer confidence and a greater contribution from eBay. For the first quarter, we expect revenue to grow approximately 6% to $6.4 billion and non-GAAP EPS to be $0.87, which represents about a 30% decline from last year. As we progress through the year, our revenue growth will accelerate. We plan to deliver at least 20% revenue growth in the fourth quarter and exit the year at a top-line growth rate in line or ahead of our medium-term target. In addition, while the trajectory of the economy has been difficult to predict and may give rise to short-term deviations in our expected performance, over the long-term, nothing has changed as it relates to our confidence in our business and our expectations for performance beyond 2022.
That said, when we laid out our medium-term outlook one year ago, underlying the assumptions was a more normalized steady state expectation for overall economic activity and consumer demand. Our medium-term targets simply did not contemplate inflation at a 40-year high and supply chain issues not seen in my lifetime. As such, 2022 is now off to a slower start than we previously anticipated and we are taking a more conservative stance on the year. We continue to believe that our revenue and earnings growth rates, as well as our free cash flow objectives are achievable in the out-years of the period contemplated in our medium-term guidance.
I want to close with these thoughts. We arguably just had one of the best years in our history when you examine our financial metrics, eclipsing $25 billion in revenue and generating almost $5.5 billion in free cash flow. By virtually any measure, we are a market leader in digital payments and we'll continue to grow faster than the market. There are very few companies of our size with our global reach, with our growth rates and cash generation. But we are in a dynamic industry and one that is constantly evolving, even more so because of COVID and we are evolving with it, notably, our strategy as it pertains to engagement and net new actives. And even with the broad diversity of our business, we are not completely insulated from macroeconomic factors that while may be impacting short-term performance have nothing to do with the long-term intrinsic value of our business. We're going to continue to innovate to grow to increase our relevance to customers and focus on the things that we can control to continue to create value and be a global leader in digital payments.
Thank you. I'll turn it over to the operator for questions. Operator? Operator, we can...
