What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-03 compared with 2020-07-30 · 169 added, 160 removed, 298 unchanged (52% of the section changed)

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Information security risks for global payments and technology companies like us have significantly increased in recent years.

Although we have developed systems and processes designed to protect data we manage, prevent data loss and other security breaches and effectively respond to known and potential risks, and expect to continue to expend significant resources to bolster these protections, we remain subject to these risks and there can be no assurance that our security measures will provide sufficient security or prevent breaches or attacks.

Although we have developed systems and processes designed to protect data we manage, prevent data loss and other security incidents and effectively respond to known and potential risks, and expect to continue to expend significant resources to bolster these protections, we remain subject to these risks and there can be no assurance that our security measures will provide sufficient security or prevent breaches or attacks.

For additional information regarding our information security risks, see Part I, Item 1A, Risk Factors in our 2019 Form 10-K, as supplemented and, to the extent inconsistent, superseded below (if applicable) in Part II, Item 1A, Risk Factors in this Form 10-Q.

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) as a pandemic.

The rapidly changing global market and economic conditions as a result of COVID-19 have impacted, and are expected to continue to impact, our operations and business.

To protect the health and safety of our employees, we have modified our business practices, including restrictions on employee travel, enabling the majority of our workforce to work from home, establishing a strict health and safety protocol for our offices that remain open including limitations on site visitors, and restricting physical participation in meetings, events, and conferences, among other modifications.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, and business partners.

The broader implications of the COVID-19 outbreak on our business, financial condition, and results of operations remain uncertain.

The outbreak has resulted in government authorities and businesses throughout the world implementing numerous measures intended to contain and limit the spread of COVID-19, including travel bans and restrictions, quarantines, shelter-in-place and lock-down orders, and business limitations and shutdowns.

These measures have negatively impacted consumer and business spending and payments activity generally, and have significantly contributed to deteriorating macroeconomic conditions and higher unemployment in some countries, including those in which we have significant operations.

The spread of COVID-19 has caused us to make significant modifications to our business practices, including enabling most of our workforce to work from home, establishing strict health and safety protocols for our offices, restricting physical participation in meetings, events, and conferences and imposing restrictions on employee travel.

We will continue to actively monitor the situation and may take further actions that may alter our business practices as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, and business partners.

While the current macroeconomic environment as a result of the COVID-19 outbreak has adversely impacted general consumer and merchant spending with a more pronounced impact on travel and events verticals, the spread of COVID-19 has also accelerated the shift from in-store shopping and traditional in-store payment methods (e.g., credit cards, debit cards, cash) towards e-commerce and digital payments and resulted in increased customer demand for safer payment and delivery solutions (e.g.

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On balance, our business has benefited from these behavioral shifts, including a significant increase in net new active accounts and payments volume.

To the extent that consumer preferences revert to pre-COVID-19 behaviors as mitigation measures to limit the spread of COVID-19 are lifted, our business, financial condition, and results of operations could be adversely impacted.

The COVID-19 outbreak has adversely impacted, and is likely to continue to adversely impact global commerce due to reduced business activity and customer spending, and increased unemployment rates, among other factors, which could materially and adversely impact our business, financial condition, and results of operations in future periods.

To the extent that consumer preferences revert to pre-COVID-19 behaviors as mitigation measures to limit the spread of COVID-19 are lifted or relaxed, our business, financial condition, and results of operations could be adversely impacted.

The rapidly changing global market and economic conditions as a result of COVID-19 have impacted, and are expected to continue to impact, our operations and business.

The broader implications of the COVID-19 outbreak on our business, financial condition, and results of operations remain uncertain.

For additional information on how COVID-19 has impacted and could continue to negatively impact our business, see below for specific discussion in the respective areas, and also refer to Part II, Item 1A, Risk Factors in this Form 10-Q.

The United Kingdom (“U.K.”) held a referendum in June 2016 in which a majority of voters approved an exit from the European Union (“EU”), commonly referred to as “Brexit.” The U.K.

formally exited the EU (and the European Economic Area (“EEA”)) on January 31, 2020 and a transition period is in place until December 31, 2020 during which time the U.K.

The United Kingdom (“U.K.”) formally exited the European Union (“EU”) and the European Economic Area (“EEA”) on January 31, 2020 (commonly referred to as “Brexit”) and a transition period is expected to be in place until December 31, 2020 during which time the U.K.

will remain in both the EU customs union and single market and follow EU rules, including those extending to EEA states.

There is a significant lack of clarity over the terms of the U.K.’s future relationship with the EU, and the international bodies that are linked to it, after this date.

Depending on the nature of the U.K.'s future relationship with the EU, we may be unable to utilize certain licenses and authorizations to operate within these markets, be required to obtain additional regulatory permissions to operate within the U.K.

market, and could face additional legal and regulatory requirements.

We are currently unable to determine the impact that Brexit will have on our business, as any impact will depend, in part, on the outcome of tariff, trade, regulatory, and other negotiations.

For additional information on how Brexit could affect our business, see Part II, Item 1A, Risk Factors in this Form 10-Q.

Brexit could adversely affect U.K., regional (including European), and worldwide economic and market conditions, and could contribute to instability in global financial and foreign currency exchange markets, including volatility in the value of the British Pound and Euro.

Brexit could therefore contribute to instability in financial, stock and foreign currency exchange markets, including volatility in the value of the British Pound and Euro.

We have foreign currency exchange exposure management programs designed to help reduce the impact from foreign currency exchange rate movements.

Net revenues generated from our U.K.

operations constituted 11% of total net revenues for each of the three and six months ended June 30, 2020 and June 30, 2019, respectively.

operations constituted 11% of total net revenues for both the three and nine months ended September 30, 2020, and approximately 10% of total net revenues for both the three and nine months ended September 30, 2019.

During each of these periods, net revenues generated from the EU (excluding the U.K.) constituted less than 20% of total net revenues.

Approximately 38% and 37% of our gross loans and interest receivables as of June 30, 2020 and December 31, 2019, respectively, were generated from our U.K.

Approximately 8% and 6% of our gross loans and interest receivables as of June 30, 2020 and December 31, 2019, respectively, were generated from the EU (excluding the U.K.).

Approximately 46% and 37% of our gross loans and interest receivables as of September 30, 2020 and December 31, 2019, respectively, were due from customers in the U.K.

Approximately 10% and 6% of our gross loans and interest receivables as of September 30, 2020 and December 31, 2019, respectively, were due from customers in the EU (excluding the U.K.).

The increase in the percentage of gross loans and interest receivable outstanding in the U.K.

and EU as of September 30, 2020 as compared to December 31, 2019 was driven by an increase in the balances in those regions as we continue to originate consumer loans in our international markets, combined with a decline in our gross total loans and interest receivable outstanding due to minimal originations in our merchant portfolio.

Overview of Results of Operations

The following table provides a summary of our condensed consolidated financial results for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, Percent Increase/(Decrease) Six Months Ended June 30, Percent Increase/(Decrease)

The following table provides a summary of our condensed consolidated financial results for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended September 30, Percent Increase/(Decrease) Nine Months Ended September 30, Percent Increase/(Decrease)

2020 2019 2020 2019

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** Not meaningful

Three Months Ended June 30, 2020 and 2019

Net revenues increased $956 million, or 22%, in the three months ended June 30, 2020, compared to the same period of the prior year driven primarily by growth in total payment volume (“TPV”, as defined below under “Net Revenues”) of 29% compared to the same period of the prior year.

Our acquisition of Honey Science Corporation (“Honey”) contributed approximately one percentage point to the growth rate of net revenues for the three months ended June 30, 2020.

Total operating expenses increased $710 million, or 20%, in the three months ended June 30, 2020, compared to the same period of the prior year due primarily to increases in transaction expense, technology and development expenses, transaction and credit losses, and general and administrative expenses.

Three Months Ended September 30, 2020 and 2019

Net revenues increased $1.1 billion, or 25%, in the three months ended September 30, 2020, compared to the same period of the prior year driven primarily by growth in total payment volume (“TPV”, as defined below under “Net Revenues”) of 38%.

Our acquisition of Honey Science Corporation (“Honey”) contributed approximately one percentage point to the growth rate of net revenues for the three months ended September 30, 2020.

Total operating expenses increased $801 million, or 22%, in the three months ended September 30, 2020, compared to the same period of the prior year due primarily to an increase in transaction expense, and to a lesser extent, increases in sales and marketing expenses, technology and development expenses, and general and administrative expenses.

Our acquisitions of Honey and a 70% equity interest in Guofubao Information Technology Co.

(GoPay), Ltd.

(“GoPay”) collectively contributed approximately six percentage points to the growth rate of total operating expenses for the three months ended June 30, 2020.

Operating income increased by $246 million, or 35%, in the three months ended June 30, 2020, compared to the same period of the prior year due to growth in net revenues, partially offset by an increase in operating expenses.

Our operating margin was 18% and 16% in the three months ended June 30, 2020 and June 30, 2019, respectively.

Operating margin for the three months ended June 30, 2020 was positively impacted by revenue growth of 22%, outpacing operating expenses growth of 20%.

Our acquisitions of Honey and GoPay collectively had a negative impact of approximately three percentage points on our operating margin for the three months ended June 30, 2020.

Net income increased by $707 million, or 86%, in the three months ended June 30, 2020, compared to the same period of the prior year due to the previously discussed increase in operating income of $246 million, an increase of $610 million in other income (expense), net driven primarily by unrealized gains on strategic investments, and partially offset by an increase in income tax expense of $149 million driven primarily by tax expense on unrealized gains on strategic investments.

Six Months Ended June 30, 2020 and 2019

Net revenues increased $1.4 billion, or 17%, in the six months ended June 30, 2020, compared to the same period of the prior year driven primarily by growth in TPV of 23%.

Our acquisition of Honey contributed approximately one percentage point to the growth rate of net revenues for the six months ended June 30, 2020.

Total operating expenses increased $1.3 billion, or 18%, in the six months ended June 30, 2020, compared to the same period of the prior year due primarily to increases in transaction expense, transaction and credit losses, technology and development expenses, and general and administrative expenses.

Our acquisitions of Honey and GoPay collectively contributed approximately six percentage points to the growth rate of total operating expenses for the six months ended June 30, 2020.

Operating income increased by $126 million, or 10%, in the six months ended June 30, 2020, compared to the same period of the prior year due to growth in net revenues, partially offset by an increase in operating expenses.

Our operating margin was 14% and 15% in the six months ended June 30, 2020 and June 30, 2019, respectively.

Operating margin for the six months ended June 30, 2020 was negatively impacted by an increase in transaction and credit losses due primarily to the impact of macroeconomic forecasts on the lifetime expected credit losses on our portfolio of loans and interest receivable, as discussed below.

Our acquisitions of Honey and GoPay collectively had a negative impact of approximately three percentage points on our operating margin for the six months ended June 30, 2020.

Net income increased by $124 million, or 8%, in the six months ended June 30, 2020, compared to the same period of the prior year due to the previously discussed increase in operating income of $126 million, an increase of $276 million in other income (expense), net driven primarily by unrealized gains on strategic investments, and partially offset by an increase in income tax expense of $278 million, driven primarily by tax expense related to the intra-group transfer of intellectual property and tax expense on unrealized gains on strategic investments.

(“GoPay”) collectively contributed approximately five percentage points to the growth rate of total operating expenses for the three months ended September 30, 2020.

Operating income increased by $280 million, or 40%, in the three months ended September 30, 2020, compared to the same period of the prior year due to growth in net revenues, partially offset by an increase in operating expenses.

Our operating margin was 18% and 16% in the three months ended September 30, 2020 and September 30, 2019, respectively.

Operating margin for the three months ended September 30, 2020 was positively impacted by revenue growth of 25%, outpacing operating expenses growth of 22%.

Our acquisitions of Honey and GoPay collectively had a negative impact of approximately three percentage points on our operating margin for the three months ended September 30, 2020.

Net income increased by $559 million, or 121%, in the three months ended September 30, 2020, compared to the same period of the prior year due to the previously discussed increase in operating income of $280 million and an increase of $380 million in other income (expense), net driven primarily by net gains on strategic investments, partially offset by an increase in income tax expense of $101 million, driven primarily by tax expense on gains on strategic investments.

Nine Months Ended September 30, 2020 and 2019

Net revenues increased $2.5 billion, or 20%, in the nine months ended September 30, 2020, compared to the same period of the prior year driven primarily by growth in TPV of 29%.

Our acquisition of Honey contributed approximately one percentage point to the growth rate of net revenues for the nine months ended September 30, 2020.

Total operating expenses increased $2.1 billion, or 19%, in the nine months ended September 30, 2020, compared to the same period of the prior year due primarily to an increase in transaction expense, and to a lesser extent, increases in technology and development expenses, transaction and credit losses, general and administrative expenses, and sales and marketing expenses.

Our acquisitions of Honey and GoPay collectively contributed approximately five percentage points to the growth rate of total operating expenses for the nine months ended September 30, 2020.

Operating income increased by $406 million, or 21%, in the nine months ended September 30, 2020, compared to the same period of the prior year due to growth in net revenues, partially offset by an increase in operating expenses.

Our operating margin was 15% in each of the nine months ended September 30, 2020 and September 30, 2019.

Our acquisitions of Honey and GoPay collectively had a negative impact of approximately three percentage points on our operating margin for the nine months ended September 30, 2020.

Net income increased by $683 million, or 35%, in the nine months ended September 30, 2020, compared to the same period of the prior year due to the previously discussed increase in operating income of $406 million and an increase of $656 million in other income (expense), net driven primarily by net gains on strategic investments, partially offset by an increase in income tax expense of $379 million, driven primarily by tax expense related to the intra-group transfer of intellectual property and gains on strategic investments.

Impact of Foreign Currency Exchange Rates

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dollar versus the British Pound, Euro, Australian dollar, and Canadian dollar, as well as other currencies in which we conduct our international operations, impact the translation of our net revenues and expenses generated in these foreign currencies into the U.S.

In the three and six months ended June 30, 2020, we generated approximately 50% and 48%, respectively, of our net revenues from customers domiciled outside of the U.S.

In each of the three and six months ended June 30, 2019, we generated approximately 47% of our net revenues from customers domiciled outside of the U.S.

In each of the three and nine months ended September 30, 2020, we generated approximately 48% of our net revenues from customers domiciled outside of the U.S.

In each of the three and nine months ended September 30, 2019, we generated approximately 47% of our net revenues from customers domiciled outside of the U.S.

Because we generate substantial net revenues internationally, we are subject to the risks of doing business outside of the U.S.

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Gains and losses from these foreign currency exchange contracts are recognized as a component of transaction revenues in the same period the forecasted transactions impact earnings.

In the three and six months ended June 30, 2020 and June 30, 2019, year-over-year foreign currency movements relative to the U.S.

In the three and nine months ended September 30, 2020 and September 30, 2019, year-over-year foreign currency movements relative to the U.S.

dollar had the following impact on our reported results:

Three Months Ended June 30, 2020 Six Months Ended June 30, 2020

Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020

(In millions)

Unfavorable impact to net revenues (exclusive of hedging impact) $ (74) $ (124)

Favorable (Unfavorable) impact to net revenues (exclusive of hedging impact) $ 73 $ (51)

Hedging impact (17) 58

Unfavorable impact to net revenues (41) (49)

Favorable impact to operating expense 38 75

Net (unfavorable) favorable impact to operating income $ (3) $ 26

Three Months Ended June 30, 2019 Six Months Ended June 30, 2019

Favorable impact to net revenues 56 7

(Unfavorable) Favorable impact to operating expense (21) 54

Net favorable impact to operating income $ 35 $ 61

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019

(In millions)

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The number of active accounts provides management with additional perspective on the growth of accounts across our Payments and Honey Platforms as well as the overall scale of our platforms.

The acquisition of Honey contributed approximately 10.2 million new active accounts on the date of acquisition in January 2020.

• Number of payment transactions are the total number of payments, net of payment reversals, successfully completed on our Payments Platform or enabled by PayPal via a partner payment solution, not including gateway-exclusive transactions.

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Net Revenues Analysis

The components of our net revenues for the three and six months ended June 30, 2020 and 2019 were as follows:

Three Months Ended June 30, Percent Increase/(Decrease) Six Months Ended June 30, Percent Increase/(Decrease)

The components of our net revenues for the three and nine months ended September 30, 2020 and 2019 were as follows:

Three Months Ended September 30, Percent Increase/(Decrease) Nine Months Ended September 30, Percent Increase/(Decrease)

2020 2019 2020 2019

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Transaction revenues

Transaction revenues grew by $1.1 billion, or 28%, and $1.6 billion, or 20%, for the three and six months ended June 30, 2020, compared to the same periods of the prior year.

The increase was mainly attributable to our core PayPal products and services, due primarily to strong growth in TPV and the number of payment transactions, both of which resulted primarily from an increase in our active accounts, and to a lesser extent, an increase in revenue from currency conversion fees driven by foreign exchange volatility.

Transaction revenues grew by $1.1 billion, or 28%, and $2.7 billion, or 23%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods of the prior year.

The current macroeconomic environment as a result of the COVID-19 outbreak has adversely impacted general consumer and merchant spending with a more pronounced impact on travel and events verticals.

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The following table provides a summary of our active accounts, number of payment transactions, TPV, and related metrics:

Three Months Ended June 30, Percent Increase/(Decrease) Six Months Ended

June 30, Percent Increase/(Decrease)

Three Months Ended September 30, Percent Increase/(Decrease) Nine Months Ended

September 30, Percent Increase/(Decrease)

2020 2019 2020 2019

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Transaction revenues grew more slowly than TPV for the three and six months ended June 30, 2020, compared to the same periods in the prior year due to a higher proportion of P2P transactions (primarily from our Venmo and core PayPal products) from which we earn lower fees and a lower proportion of cross border transactions, partially offset by foreign currency exchange hedging gains.

Changes in prices charged to our customers did not significantly impact transaction revenue growth for both the three and six months ended June 30, 2020.

Transaction revenues grew more slowly than TPV and number of payment transactions for the three and nine months ended September 30, 2020, compared to the same periods in the prior year due to a higher proportion of P2P transactions (primarily from our Venmo products) from which we earn lower fees and a higher portion of TPV generated by large merchants and platform partners who generally pay lower rates with higher transaction volumes.

Additionally, foreign currency exchange hedging contributed to a decline in transaction revenues with hedging losses recorded in the three months ended September 30, 2020 compared to gains recorded in the prior period, and a net decline in hedging gains in the nine months ended September 30, 2020 as compared to the prior period.

Changes in prices charged to our customers did not significantly impact transaction revenue growth for both the three and nine months ended September 30, 2020.

Revenues from other value added services

For the three and six months ended June 30, 2020, net revenues from other value added services decreased $111 million, or 26%, and $105 million, or 13%, compared to the same periods in the prior year.

The decrease for the three and six months ended June 30, 2020 was primarily attributable to a decrease in revenue earned from transition servicing activities provided to Synchrony Bank (“Synchrony”), which ended in the second quarter of 2019, and a decline in interest earned on certain assets underlying customer balances resulting from lower interest rates.

Additionally, a decrease in interest and fee income on our loans and advances receivable contributed to the decline in net revenues from other value added services for the three and six months ended June 30, 2020 due to an increase in the allowances provided for interest and fees receivable, a decline in originations and payment holidays that we provided to our customers as a part of our COVID-19 payment relief initiatives.

This decline was partially offset by incremental revenues from our acquisition of Honey, which contributed approximately 14 and 13 percentage points to the growth rate for the three and six months ended June 30, 2020, respectively.

Additionally, the decline in the six months ended June 30, 2020 was partially offset by an increase in our revenue share with Synchrony compared to the same period of the prior year.

The total gross loans and interest receivable balance was $4.0 billion as of June 30, 2020 and $3.4 billion as of June 30, 2019, reflecting a year-over-year increase of 18% driven primarily by growth in our consumer receivable portfolio.

For the three months ended September 30, 2020, revenues from other value added services decreased $40 million, or 9%, compared to the same period in the prior year.

The decrease was primarily attributable to a decline in interest earned on certain assets underlying customer balances resulting from lower interest rates, a decrease in interest and fee income on our merchant loans and advances receivable resulting from a decline in originations, and a decline in our revenue share with Synchrony Bank (“Synchrony”).

This decline was partially offset by incremental revenues from our acquisition of Honey, which contributed approximately 15 percentage points to the revenue growth rate for the three months ended September 30, 2020, and an increase in interest and fee income on our consumer loans receivable.

For the nine months ended September 30, 2020, revenues from other value added services decreased $145 million, or 12%, compared to the same period in the prior year due to a decline in interest earned on certain assets underlying customer balances resulting from lower interest rates and a decline in revenue earned from transition servicing activities provided to Synchrony, which ended in the second quarter of 2019.

Additionally, a decrease in interest and fee income on our loans and advances receivable due to an increase in the allowances provided for interest and fees receivable, a decline in originations, and payment holidays that we provided to our customers as a part of our COVID-19 payment relief initiatives also contributed to the decline in revenues from other value added services for the nine months ended September 30, 2020.

This decline was partially offset by incremental revenues from our acquisition of Honey, which contributed approximately 14 percentage points to the revenue growth rate for the nine months ended September 30, 2020.

The total gross loans and interest receivable balance was $3.4 billion as of September 30, 2020 and $3.7 billion as of September 30, 2019, reflecting a year-over-year decrease of 8% driven primarily by a decline in our merchant receivable portfolio due to reduced originations, partially offset by growth in our consumer receivable portfolio.

In response to the COVID-19 outbreak, we have taken both proactive and reactive measures to support our merchants and consumers that have loans and interest receivables due to us under our credit product offerings.

These measures are intended to reduce financial difficulties experienced by our customers and include providing payment holidays, under which we granted payment deferrals to borrowers for varying periods of time in certain cases.

These measures have adversely impacted and are expected to continue to adversely impact the recognition of interest and fee income in future periods.

Given the uncertainty surrounding the COVID-19 outbreak, including the duration and the ultimate impact it may have on the financial condition of our merchants and consumers, the extent of these types of actions and the impact they may have on our interest and fee income is not determinable.

Given the uncertainty surrounding the COVID-19 outbreak, including its duration and severity and the ultimate impact it may have on the financial condition of our merchants and consumers, the extent of these types of actions and the impact they may have on our interest and fee income is not determinable.

In addition, consumers that have outstanding loans and interest receivable due to Synchrony may be offered similar support, and ultimately may experience similar hardships that result in increased losses recognized by Synchrony, which may result in a decrease in our revenue share earned from Synchrony in future periods.

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Further, in the event the overall return on the PayPal branded credit programs managed by Synchrony does not meet the minimum return threshold as measured over four consecutive quarters and in the following quarter, we would be required to make a payment to Synchrony, subject to certain limitations.

Through June 30, 2020, the overall return on the PayPal branded credit programs funded by Synchrony exceeded the minimum return threshold.

Through September 30, 2020, the overall return on the PayPal branded credit programs funded by Synchrony exceeded the minimum return threshold.

Operating Expenses

The following table summarizes our operating expenses and related metrics we use to assess the trends in each:

Three Months Ended June 30, Percent Increase/(Decrease) Six Months Ended June 30, Percent Increase/(Decrease)

Three Months Ended September 30, Percent Increase/(Decrease) Nine Months Ended September 30, Percent Increase/(Decrease)

2020 2019 2020 2019

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Transaction Expense

Transaction expense increased by $216 million, or 13%, and $406 million, or 13%, in the three and six months ended June 30, 2020, respectively, compared to the same periods of the prior year due primarily to the increase in TPV of 29% and 23% for the three and six months ended June 30, 2020, respectively.

The decrease in transaction expense rate for the three and six months ended June 30, 2020, compared to the same periods of the prior year was due primarily to favorable changes in product mix and funding mix.

Transaction expense increased by $321 million, or 19%, and $727 million, or 15%, in the three and nine months ended September 30, 2020, respectively, compared to the same periods of the prior year due primarily to the increase in TPV of 38% and 29% for the three and nine months ended September 30, 2020, respectively.

The decrease in transaction expense rate for the three and nine months ended September 30, 2020, compared to the same periods of the prior year was due primarily to favorable changes in product mix and funding mix.

Our transaction expense rate is impacted by changes in product mix, regional mix, funding mix, and assessments charged by payment processors and other financial institutions when we draw funds from a customer’s credit or debit card, bank account, or other funding sources.

The cost of funding a transaction with a credit or debit card is generally higher than the cost of funding a transaction from a bank or through internal sources such as a PayPal or Venmo account balance, or PayPal Credit.

For each of the three and six months ended June 30, 2020 and 2019, approximately 2% of TPV was funded with PayPal Credit.

For the three and six months ended June 30, 2020, approximately 40% and 39% of TPV, respectively, was generated outside of the U.S.

For both the three and six months ended June 30, 2019, 41% of TPV was generated outside of the U.S.

For the three and nine months ended September 30, 2020, approximately 1% and 2% of TPV, respectively, was funded with PayPal Credit.

For each of the three and nine months ended September 30, 2019, approximately 2% of TPV was funded with PayPal Credit.

For each of the three and nine months ended September 30, 2020, approximately 39% of TPV was generated outside of the U.S.

For the three and nine months ended September 30, 2019, approximately 40% and 41% of TPV, respectively, was generated outside of the U.S.

As we expand the availability and presentation of alternative funding sources to our customers, our funding mix may change, which could increase or decrease our transaction expense rate.

Transaction and Credit Losses

The components of our transaction and credit losses for the three and six months ended June 30, 2020 and 2019 were as follows:

Three Months Ended June 30, Percent Increase/(Decrease) Six Months Ended June 30, Percent Increase/(Decrease)

The components of our transaction and credit losses for the three and nine months ended September 30, 2020 and 2019 were as follows:

Three Months Ended September 30, Percent Increase/(Decrease) Nine Months Ended September 30, Percent Increase/(Decrease)

2020 2019 2020 2019

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(1) Transaction loss rate is calculated by dividing transaction losses by TPV.

Transaction losses increased by $24 million, or 10%, and decreased $15 million, or 3%, in the three and six months ended June 30, 2020, respectively, compared to the same periods of the prior year.

The increase in the three months ended June 30, 2020 was primarily due to growth in TPV, partially offset by benefits realized through improvements in risk management capabilities.

The decrease in the six months ended June 30, 2020 was due to benefits realized through improvements in risk management capabilities, which more than offset the increase in transaction losses resulting from growth in TPV over the same period.

These factors also contributed to a decrease in our transaction loss rate in the three and six months ended June 30, 2020, compared to the same periods of the prior year.

Transaction losses increased by $73 million, or 29%, and $58 million, or 7%, in the three and nine months ended September 30, 2020, respectively, compared to the same periods of the prior year.

The increase in the three and nine months ended September 30, 2020 was primarily due to growth in TPV, partially offset by benefits realized through improvements in risk management capabilities, which also contributed to a decrease in our transaction loss rate in the three and nine months ended September 30, 2020, compared to the same periods of the prior year.

The duration and severity of the impacts of the COVID-19 outbreak remain unknown.

The negative impact on macroeconomic conditions could increase the risk of merchant bankruptcy, insolvency, business failure, or other business interruption which may result in an adverse impact on our transaction losses, particularly for merchants that sell goods or services in advance of the date of their delivery or use.

Credit losses increased by $98 million, or 138%, and $387 million, or 307%, in the three and six months ended June 30, 2020, respectively, compared to the same periods of the prior year due primarily to an increase in provisions for our loans and interest receivable associated with changes in current and projected macroeconomic conditions, including qualitative adjustments to account for the impact from varying degrees of merchant performance in the current environment and expected performance in future periods, as well as payment holidays provided as a part of our COVID-19 payment relief initiatives.

Our estimate of the macroeconomic impact on lifetime expected credit losses is most significantly impacted by projected unemployment trends and benchmark credit card charge-off rates, which directly correlate to the forecast of loans and interest receivables that will charge off in the future.

Credit losses for the three months ended June 30, 2020 include the impact of a sharp increase in actual unemployment rates, expectations of a prolonged recovery period, and an overall deterioration in macroeconomic projections as compared to the three months ended March 31, 2020.

If the actual unemployment and charge-offs vary from these projections as of June 30, 2020, the credit losses recognized in future periods will be impacted.

Credit losses for the three and six months ended June 30, 2020 consisted primarily of approximately $100 million and $327 million, respectively, of provision associated with the deteriorating macroeconomic projections, and to a lesser extent, provisions associated with credit quality and originations during the same period.

The consumer loans and interest receivables balance as of June 30, 2020 and June 30, 2019 was $1.5 billion and $909 million, respectively, representing a year-over-year increase of 63% driven by growth in international markets.

Approximately 89% and 93% of our consumer loans receivable outstanding as of June 30, 2020 and June 30, 2019, respectively, were due from consumers in the U.K.

The negative impact on macroeconomic conditions could increase the risk of merchant bankruptcy, insolvency, business failure, or other business interruption, which may adversely impact our transaction losses, particularly for merchants that sell goods or services in advance of the date of their delivery or use.

Credit losses decreased by $69 million, or 82%, in the three months ended September 30, 2020, compared to the same period of the prior year due to a significant decline in loan originations related to our merchant loans and advances portfolio.

Credit losses increased $318 million, or 151%, in the nine months ended September 30, 2020, compared to the same period of the prior year due primarily to an increase in provisions for our loans and interest receivable associated with changes in current and projected macroeconomic conditions, including qualitative adjustments to account for the impact of limitations in our expected credit loss models that have arisen due to the extreme fluctuations in both the actual and projected macroeconomic conditions during the period as well as to incorporate varying degrees of merchant performance in the current environment and expected performance in future periods.

Credit losses for the nine months ended September 30, 2020 include the impact of the increase in actual unemployment rates during the current period and expectations of a prolonged economic recovery period over which the value of loans and interest receivable that charge-off are projected to exceed historical trends.

If the actual unemployment and charge-offs vary from these projections as of September 30, 2020, the credit losses recognized in future periods will be impacted.

Credit losses for the nine months ended September 30, 2020 consisted primarily of approximately $322 million of provision associated with the deteriorating macroeconomic projections, and to a lesser extent, provisions associated with originations and changes in credit quality during the period.

The consumer loans and interest receivables balance as of September 30, 2020 and September 30, 2019 was $1.6 billion and $1.0 billion, respectively, representing a year-over-year increase of 57% driven by growth in international markets.

Approximately 87% and 93% of our consumer loans receivable outstanding as of September 30, 2020 and September 30, 2019, respectively, were due from consumers in the U.K.

The following table provides information regarding the credit quality of our consumer loans and interest receivable balance:

September 30,

Percent of consumer loans and interest receivables current (1), (2)

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(4) Net charge off rate is the annual ratio of net credit losses, excluding fraud losses, on consumer loans receivables as a percentage of the average daily amount of consumer loans and interest receivables balance during the period.

The increase in the net charge off rate for consumer receivables at June 30, 2020 as compared to June 30, 2019 was primarily attributable to the continued expansion and maturity of our international consumer loan receivable portfolio.

The increase in the net charge off rate for consumer receivables at September 30, 2020 as compared to September 30, 2019 was primarily attributable to the continued expansion and maturity of our international consumer loan receivable portfolio.

We offer business financing solutions to certain small and medium-sized merchants.

Total merchant loans, advances, and interest and fees receivable outstanding, net of participation interest sold, as of June 30, 2020 were $2.5 billion, compared to $2.4 billion as of June 30, 2019, representing a year-over-year increase of 3%.

The increase in merchant loans, advances, and interest and fees receivable outstanding was due primarily to the growth in our business financing solutions through March 31, 2020, offset by a reduction in originations in the three months ended June 30, 2020 due to modifications in our acceptable risk parameters as well as a shift to originations through the Paycheck Protection Program for which we do not own the receivables.

Approximately 86% and 8% of our merchant receivables outstanding as of June 30, 2020 were due from merchants in the U.S.

and U.K., respectively, as compared to 84% and 10% as of June 30, 2019.

Total merchant loans, advances, and interest and fees receivable outstanding, net of participation interest sold, as of September 30, 2020 were $1.7 billion, compared to $2.6 billion as of September 30, 2019, representing a year-over-year decrease of 33%.

The decrease in merchant loans, advances, and interest and fees receivable outstanding was due primarily to a reduction in originations due to modifications in our acceptable risk parameters as well as a shift to originations through the U.S.

Government’s Paycheck Protection Program (“PPP”) administered by the U.S.

Small Business Administration (“SBA”) and enacted in March 2020 under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in response to the COVID-19 pandemic.

We do not own the receivables associated with the originations through the PPP.

Approximately 84% and 8% of our merchant receivables outstanding as of September 30, 2020 were due from merchants in the U.S.

and U.K., respectively, as compared to 84% and 9% as of September 30, 2019.

The following table provides information regarding the credit quality of our merchant loans, advances, and interest and fees receivable balance:

September 30,

Percent of merchant receivables within original expected or contractual repayment period 77.6 % 90.5 %

85.6 % 91.0 %

Percent of merchant receivables > 90 days outstanding after the end of original expected or contractual repayment period (1)

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(2) Net charge off rate is the annual ratio of net credit losses, excluding fraud losses, on merchant loans and advances as a percentage of the average daily amount of merchant loans, advances, and interest and fees balance during the period.

The decline in the percent of merchant receivables within the original expected or contractual repayment period, and increase in percent of merchant receivables greater than 90 days outstanding at June 30, 2020 as compared to June 30, 2019, was primarily due to an increase in payment delinquency driven by financial difficulties experienced by our merchants associated with the economic impact of COVID-19.

The decrease in the net charge off rate for merchant receivables was primarily attributable to the suspension of aging of a significant portion of our merchant receivables over the duration of the payment holiday which resulted in a decrease in the charge off of accounts in the three months ended June 30, 2020.

We expect the net charge off rate to increase through the remainder of the year as the payment holidays continue to expire.

During the three and six months ended June 30, 2020, modifications to the acceptable risk parameters of our credit products in response to the impacts of the COVID-19 outbreak resulted in the implementation of a number of risk mitigation strategies, including reduction of maximum loan size, tightening eligible terms, and a shift from automated to manual underwriting of loans and advances.

These changes in acceptable risk parameters have resulted in a deceleration in the growth of our borrowing base during the three months ended June 30, 2020.

Beginning in July 2020, we expect to offer certain merchants amended payment plans to existing loans receivable, which may include longer repayment terms and modifications to existing fee structures.

While the impact of COVID-19 on the economic environment remains uncertain, the longer and more severe the outbreak, the more likely it is to have a material adverse impact on our borrowing base, which is primarily comprised of small and medium-sized merchants, and a continued reduction in the volume of lending activity during the remainder of the year.

The decline in the percent of merchant receivables within the original expected or contractual repayment period, increase in percent of merchant receivables greater than 90 days outstanding, and increase in the net charge off rate for merchant receivables at September 30, 2020 as compared to September 30, 2019, was primarily due to an increase in payment delinquency driven by financial difficulties experienced by our merchants associated with the economic impact of COVID-19 and also as a result of a significant decline in our outstanding merchant receivables balance due to repayments and reduced originations, which increases net charge offs and delinquency rates presented as a percentage of outstanding loan balance.

Beginning in the third quarter of 2020, we have granted certain merchants loan modifications intended to provide them with financial relief and to help enable us to mitigate losses.

The associated loans and interest receivables have been treated as troubled debt restructurings due to the significant changes in structure, including repayment terms and fee/rate structure.

For additional information, see “Note 11—Loans and Interest Receivable” in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

During the three and nine months ended September 30, 2020, modifications to the acceptable risk parameters of our credit products in response to the impacts of the COVID-19 outbreak resulted in the implementation of a number of risk mitigation strategies, including reduction of maximum loan size, tightening eligibility terms, and a shift from automated to manual underwriting of loans and advances.

These changes in acceptable risk parameters have resulted in a deceleration in the growth of our borrowing base and a decrease in merchant receivables as of September 30, 2020.

While the impact of COVID-19 on the economic environment remains uncertain, the longer and more severe the outbreak, the more likely it is to have a material adverse impact on our borrowing base, which is primarily comprised of small and medium-sized merchants, and a continued lower volume of lending activity during the remainder of the year.

For additional information, see “Note 11—Loans and Interest Receivable” in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Customer Support and Operations

Customer support and operations expenses increased by $24 million, or 6%, and $35 million, or 4%, in the three and six months ended June 30, 2020, respectively, compared to the same periods of the prior year due primarily to an increase in employee-related expenses and contractors and consulting costs in our operations function that support the growth of our active accounts and payment transactions.

The increase in the six months ended June 30, 2020 compared to the same period of the prior year was also attributable to customer onboarding and compliance costs.

Customer support and operations expenses increased by $59 million, or 15%, and $94 million, or 8%, in the three and nine months ended September 30, 2020, respectively, compared to the same periods of the prior year due primarily to an increase in employee-related expenses and contractors and consulting costs in our operations function that support the growth of our active accounts and payment transactions, as well as customer onboarding and compliance costs.

Sales and Marketing

Sales and marketing expenses increased by $58 million, or 16%, and $100 million, or 15%, in the three and six months ended June 30, 2020, respectively, compared to the same periods of the prior year due primarily to higher spend on marketing programs and increases in amortization of acquired intangibles and employee-related expenses, partially offset by a decline in consulting services.

Our acquisitions of Honey and GoPay collectively contributed approximately 21 and 20 percentage points to the growth rate of sales and marketing expenses for the three and six months ended June 30, 2020, respectively.

Sales and marketing expenses increased by $155 million, or 49%, and $255 million, or 25%, in the three and nine months ended September 30, 2020, respectively, compared to the same periods of the prior year due primarily to higher spend on marketing programs and employee-related expenses.

Our acquisitions of Honey and GoPay collectively contributed approximately 21 and 20 percentage points to the growth rate of sales and marketing expenses for the three and nine months ended September 30, 2020, respectively.

Technology and Development

Technology and development expenses increased by $148 million, or 31%, and $242 million, or 24%, in the three and six months ended June 30, 2020, respectively, compared to the same periods of the prior year due primarily to increases in employee-related expenses, amortization of acquired intangibles, and data center and cloud computing services utilized in delivering our products.

Our acquisitions of Honey and GoPay collectively contributed approximately 16 and 15 percentage points to the growth rate of technology and development expenses for the three and six months ended June 30, 2020, respectively.

Technology and development expenses increased by $141 million, or 26%, and $383 million, or 25%, in the three and nine months ended September 30, 2020, respectively, compared to the same periods of the prior year due primarily to increases in employee-related expenses, amortization of acquired intangibles, and data center and cloud computing services utilized in delivering our products.

Our acquisitions of Honey and GoPay collectively contributed approximately 15 percentage points to the growth rate of technology and development expenses for both the three and nine months ended September 30, 2020.

General and Administrative

General and administrative expenses increased by $93 million, or 22%, and $160 million, or 19%, in the three and six months ended June 30, 2020, respectively, compared to the same periods of the prior year due primarily to increases in professional services expenses, including those attributable to acquisition-related transaction expense, employee-related expenses, depreciation expense, and charitable contributions supporting racial equality.

The increase in the six months ended June 30, 2020 was also attributable to expenses related to contingencies.

Our acquisitions of Honey and GoPay collectively contributed approximately 13 percentage points to the growth rate of general and administrative expenses for both the three and six months ended June 30, 2020.

General and administrative expenses increased by $102 million, or 25%, and $262 million, or 21%, in the three and nine months ended September 30, 2020, respectively, compared to the same periods of the prior year due primarily to increases in employee-related expenses, professional services expenses, including those attributable to acquisition-related transaction expenses, and depreciation expense.

Restructuring and Other Charges

Restructuring and other charges increased by $49 million and $5 million in the three and six months ended June 30, 2020, respectively, compared to the same periods of the prior year.

During the first quarter of 2020, management approved a strategic reduction of the existing global workforce, which resulted in restructuring charges of $26 million and $55 million during the three and six months ended June 30, 2020, respectively.

Restructuring and other charges increased by $19 million and $24 million in the three and nine months ended September 30, 2020, respectively, compared to the same periods of the prior year.

During the first quarter of 2020, management approved a strategic reduction of the existing global workforce, which resulted in restructuring charges of $19 million and $74 million during the three and nine months ended September 30, 2020, respectively.

The approved strategic reduction in 2020 is part of a multiphase process to reorganize our workforce concurrently with the redesign of our operating structure, which we expect will span multiple quarters.

We primarily incurred employee severance and benefits costs, as well as other associated consulting costs under the 2020 strategic reduction.

This strategic reduction is expected to be substantially completed by the end of 2020.

Additionally, in the second quarter of 2020, we incurred asset impairment charges of $21 million due to the write-off of a certain right of use lease asset and related leasehold improvements in conjunction with the exiting of certain leased properties.

We experienced delays, primarily as a result of COVID-19, in the execution of these restructuring actions, which are now expected to be completed by the end of the first quarter of 2021.

Additionally, in the second quarter of 2020, we incurred asset impairment charges of $21 million due to the write-off of a certain right-of-use lease asset and related leasehold improvements in conjunction with exiting certain leased properties.

During the first quarter of 2019, management approved strategic reductions of the existing global workforce which resulted in restructuring charges of $78 million.

The approved strategic reductions for 2019 were intended to better align our teams to support key business priorities, and included the transfer of certain operational functions between geographies, as well as the impact of the transition of servicing activities provided to Synchrony, which ended in the second quarter of 2019.

We primarily incurred employee severance and benefits expenses under the 2019 strategic reductions, which were substantially completed by the first quarter of 2020.

We primarily incurred employee severance and benefits expenses under the 2019 strategic reductions, which were substantially completed by the end of the first quarter of 2020.

For information on the associated restructuring liability, see “Note 17—Restructuring and Other Charges” in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Other Income (Expense), Net

Other income (expense), net increased $610 million and $276 million in the three and six months ended June 30, 2020, respectively, compared to the same periods of the prior year.

The increase was driven by net unrealized gains of $670 million and $366 million on strategic investments during the three and six months ended June 30, 2020, respectively, compared to the same periods of the prior year primarily due to favorable changes in fair value related to our marketable equity securities.

The increase in the three and six months ended June 30, 2020 was partially offset by an increase in interest expense associated with our fixed rate notes issued in the third quarter of 2019 and second quarter of 2020, as well as a decline in interest income driven by lower interest rates.

Other income (expense), net increased $380 million and $656 million in the three and nine months ended September 30, 2020, respectively, compared to the same periods of the prior year.

The increase was driven by net gains of $437 million and $803 million on strategic investments during the three and nine months ended September 30, 2020, respectively, compared to the same periods of the prior year primarily due to favorable changes in fair value related to our marketable equity securities.

The increase in the three and nine months ended September 30, 2020 from net gains on strategic investments was partially offset by a decline in interest income driven by lower interest rates as well as an increase in interest expense associated with our fixed rate notes issued in the third quarter of 2019 and second quarter of 2020.

Income Tax Expense

Our effective income tax rate was approximately 15% and 13% for the three months ended June 30, 2020 and 2019, respectively.

The increase in our effective income tax rate for the three months ended June 30, 2020, compared to the same period of the prior year was due primarily to an increase in tax expense associated with unrealized gains on strategic investments, partially offset by a favorable shift in earnings.

Our effective income tax rate was approximately 22% and 10% for the six months ended June 30, 2020 and 2019, respectively.

The increase in our effective income tax rate for the six months ended June 30, 2020, compared to the same period of the prior year was due primarily to tax expense related to the intra-group transfer of intellectual property and tax expense on unrealized gains on strategic investments, partially offset by a favorable shift in earnings.

Our calculation of income tax expense for the three and six months ended June 30, 2020 is dependent in part on forecasts of full year results.

The impact of the COVID-19 outbreak to the economic environment is uncertain and difficult to predict and may change these forecasts, which could materially impact tax expense as reported for the three and six months ended June 30, 2020.

Our effective income tax rate was approximately 11% and 5% for the three months ended September 30, 2020 and 2019, respectively.

The increase in our effective income tax rate for the three months ended September 30, 2020, compared to the same period of the prior year was due primarily to an increase in tax expense associated with gains on strategic investments.

Our effective income tax rate was approximately 18% and 9% for the nine months ended September 30, 2020 and 2019, respectively.

The increase in our effective income tax rate for the nine months ended September 30, 2020, compared to the same period of the prior year was due primarily to tax expense related to the intra-group transfer of intellectual property and gains on strategic investments.

Our calculation of income tax expense for the three and nine months ended September 30, 2020 is dependent in part on forecasts of full year results.

Liquidity and Capital Resources

We require liquidity and access to capital to fund our global operations, including customer protection programs, our credit products, capital expenditures, investments in our business, potential acquisitions and strategic investments, working capital, and other cash needs.

The following table summarizes our cash, cash equivalents, and investments as of June 30, 2020 and December 31, 2019:

June 30, 2020 December 31, 2019

The following table summarizes our cash, cash equivalents, and investments as of September 30, 2020 and December 31, 2019:

September 30, 2020 December 31, 2019

(In millions)

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$ 15,296 $ 11,722

(1) Excludes assets related to funds receivable and customer accounts of $29.0 billion and $22.5 billion at June 30, 2020 and December 31, 2019, respectively.

(2) Excludes total restricted cash of $75 million and $64 million at June 30, 2020 and December 31, 2019, respectively, and strategic investments of $2.6 billion and $1.8 billion as of June 30, 2020 and December 31, 2019, respectively.

(1) Excludes assets related to funds receivable and customer accounts of $30.5 billion and $22.5 billion at September 30, 2020 and December 31, 2019, respectively.

(2) Excludes total restricted cash of $83 million and $64 million at September 30, 2020 and December 31, 2019, respectively, and strategic investments of $2.2 billion and $1.8 billion as of September 30, 2020 and December 31, 2019, respectively.

Foreign Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments held by our foreign subsidiaries were $6.7 billion as of June 30, 2020 and $7.2 billion at December 31, 2019, or 50% and 61% of our total cash, cash equivalents, and investments as of those respective dates.

Cash, cash equivalents, and investments held by our foreign subsidiaries were $7.7 billion as of September 30, 2020 and $7.2 billion at December 31, 2019, or 50% and 61% of our total cash, cash equivalents, and investments as of those respective dates.

At December 31, 2019, all of our cash, cash equivalents, and investments held by foreign subsidiaries were subject to U.S.

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Proceeds from the issuance of these notes may be used for general corporate purposes, which may include funding the repayment or redemption of outstanding debt, share repurchases, ongoing operations, capital expenditures, and possible acquisitions of businesses, assets, or strategic investments.

As of June 30, 2020, we had $9.0 billion in fixed rate debt outstanding with varying maturity dates.

As of September 30, 2020, we had $9.0 billion in fixed rate debt outstanding with varying maturity dates.

In September 2019, we entered into a credit agreement (the “Credit Agreement”) that provides for an unsecured $5.0 billion, five-year revolving credit facility that includes a $150 million letter of credit sub-facility and a $500 million swingline sub-facility, with available borrowings under the revolving credit facility reduced by the amount of any letters of credit and swingline borrowings outstanding from time to time.

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In May 2020, we repaid the $3.0 billion using proceeds from the May 2020 debt issuance.

As of June 30, 2020, no amounts were outstanding under the Credit Agreement.

As of September 30, 2020, no amounts were outstanding under the Credit Agreement.

We maintain uncommitted credit facilities in various regions throughout the world, with borrowing capacity of approximately $130 million in the aggregate.

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Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings.

As of June 30, 2020, substantially all of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing.

As of September 30, 2020, substantially all of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing.

Other than as described above, there are no significant changes to the available credit and debt disclosed in our 2019 Form 10-K.

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The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income under each arrangement.

As of June 30, 2020, we had a total of $3.0 billion in cash withdrawals offsetting our $3.0 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangements.

As of September 30, 2020, we had a total of $4.1 billion in cash withdrawals offsetting our $4.1 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangements.

Liquidity for Loans Receivable Portfolio Growth

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credit activities.

As of June 30, 2020, the cumulative amount approved by management to be designated for credit activities aggregated to $2.0 billion and represented approximately 26% of European customer balances potentially available for corporate use by us at that date as determined by applying financial regulations maintained by the CSSF.

As of September 30, 2020, the cumulative amount approved by management to be designated for credit activities aggregated to $2.0 billion and represented approximately 24% of European customer balances potentially available for our corporate use at that date as determined by applying financial regulations maintained by the CSSF.

We may periodically seek to designate additional amounts of customer balances, if necessary, based on utilization of the approved funds and anticipated credit funding requirements.

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Under certain exceptional circumstances, corporate liquidity could be called upon to meet our obligations related to our European customer balances.

In April 2020, PayPal was approved to participate in the U.S.

Government’s Paycheck Protection Program, which is designed to provide a direct incentive for small businesses to keep their workers on payroll during the COVID-19 outbreak.

In April 2020, PayPal was approved to participate in the PPP administered by the SBA.

The program was designed to provide a direct incentive for small businesses to keep their workers on payroll during the COVID-19 outbreak and includes initial loan repayment deferrals and debt forgiveness provisions for eligible borrowers.

The PPP expired on August 8, 2020, but may be subject to further extension by the U.S.

Loans made under this program are funded by an independent chartered financial institution that we partner with, and the related receivables are not purchased by PayPal.

We receive a fee for providing origination services and loan servicing for the loans and retain operational risk related to those activities.

As of July 28, 2020, originations facilitated through PayPal under this program were approximately $2.1 billion.

Through the August 8, 2020 expiration date, originations facilitated through PayPal under this program were approximately $2.1 billion.

Credit Ratings

As of June 30, 2020, we continue to be rated investment grade by Standard and Poor’s Financial Services, LLC, Fitch Ratings, Inc., and Moody’s Investors Services, Inc.

As of September 30, 2020, we continue to be rated investment grade by Standard and Poor’s Financial Services, LLC, Fitch Ratings, Inc., and Moody’s Investors Services, Inc.

We expect that these credit rating agencies will continue to monitor our performance, including our capital structure and results of operations.

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Stock Repurchases and Acquisitions

During the six months ended June 30, 2020, we repurchased approximately $1.0 billion of our common stock in the open market under our stock repurchase programs authorized in April 2017 and July 2018.

During the nine months ended September 30, 2020, we repurchased approximately $1.4 billion of our common stock in the open market under our stock repurchase programs authorized in April 2017 and July 2018.

The July 2018 stock repurchase program became effective during the first quarter of 2020 upon completion of the April 2017 stock repurchase program.

As of June 30, 2020, a total of approximately $9.0 billion remained available for future repurchases of our common stock under our July 2018 stock repurchase program.

As of September 30, 2020, a total of approximately $8.7 billion remained available for future repurchases of our common stock under our July 2018 stock repurchase program.

In January 2020, we completed our acquisition of Honey for approximately $3.6 billion in cash and approximately $400 million in assumed restricted stock, restricted stock units, and options, subject to vesting conditions.

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Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating, our financial performance, and global credit market conditions, as well as a broad range of other factors including those related to the COVID-19 outbreak discussed elsewhere in this Form 10-Q.

In addition, our liquidity, access to capital, and borrowing costs could be negatively impacted by the outcome of any of the legal or regulatory proceedings to which we are a party.

In addition, our liquidity, access to capital, and borrowing costs could be negatively impacted by the outcome of any legal or regulatory proceedings to which we are a party.

See Part I, Item 1A, Risk Factors in our 2019 Form 10-K, as supplemented and, to the extent inconsistent, superseded below in Part II, Item 1A, Risk Factors in this Form 10-Q, as well as “Note 13—Commitments and Contingencies” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for additional discussion of these and other risks that our business faces.

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The following table summarizes our condensed consolidated statements of cash flows:

Six Months Ended June 30,

Nine Months Ended September 30,

(In millions)

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Effect of exchange rates on cash, cash equivalents, and restricted cash 26 (49)

Net increase (decrease) in cash, cash equivalents, and restricted cash $ 2,261 $ (1,259)

Net increase in cash, cash equivalents, and restricted cash $ 1,379 $ 1,751

Operating Activities

We generated cash from operating activities of $3.9 billion in the six months ended June 30, 2020 due primarily to operating income of $1.3 billion, as well as adjustments for non-cash expenses including:

We generated cash from operating activities of $4.6 billion in the nine months ended September 30, 2020 due primarily to operating income of $2.3 billion, as well as adjustments for non-cash expenses including:

provision for transaction and credit losses of $1.4 billion, stock-based compensation of $999 million, and depreciation and amortization of $888 million.

Net income was also adjusted for net unrealized gains on our strategic investments of $739 million and changes in other assets and liabilities of $639 million, primarily related to an increase in funds payable and amounts due to customers of $705 million partially offset by actual cash transaction losses incurred during the period.

We generated cash from operating activities of $2.2 billion in the six months ended June 30, 2019 due primarily to operating income of $1.2 billion, as well as adjustments for non-cash expenses related to provision for transaction and credit losses of $659 million, stock-based compensation of $470 million, and depreciation and amortization of $458 million.

Net income was also adjusted for unrealized gains on our strategic investments of $398 million and changes in other assets and liabilities of $303 million, primarily related to actual cash transaction losses incurred during the period.

In the six months ended June 30, 2020 and 2019, cash paid for income taxes, net was $70 million and $176 million, respectively.

Net income was also adjusted for net gains on our strategic investments of $973 million, changes in income taxes payable of $115 million, and changes in other assets and liabilities of $120 million, primarily related to actual cash transaction losses of $816 million incurred during the period and an increase in other assets of $218 million, partially offset by an increase in accrued expenses and other liabilities of $814 million and an increase in funds payable and amounts due to customers of $118 million.

We generated cash from operating activities of $3.3 billion in the nine months ended September 30, 2019 due primarily to operating income of $1.9 billion, adjusted for non-cash expenses related to provision for transaction and credit losses of $999 million, stock-based compensation of $736 million, and depreciation and amortization of $685 million.

Net income was also adjusted for net gains on our strategic investments of $170 million, changes in other assets and liabilities of $470 million, primarily related to actual cash transaction losses incurred during the period, deferred income taxes of $122 million, and accounts receivable of $103 million.

In the nine months ended September 30, 2020 and 2019, cash paid for income taxes, net was $444 million and $220 million, respectively.

Investing Activities

The net cash used in investing activities of $10.1 billion in the six months ended June 30, 2020 was due primarily to purchases of investments of $14.8 billion, acquisitions (net of cash acquired) of $3.6 billion, changes in funds receivable from customers of $1.1 billion, and purchases of property and equipment of $399 million.

These cash outflows were partially offset by maturities and sales of investments of $9.8 billion and proceeds from the sale of property and equipment of $120 million.

The net cash used in investing activities of $6.0 billion in the six months ended June 30, 2019 was due primarily to purchases of investments of $13.2 billion, changes in funds receivable from customers of $2.2 billion, changes in principal loans receivable, net of $732 million, and purchases of property and equipment of $357 million.

The net cash used in investing activities of $13.3 billion in the nine months ended September 30, 2020 was due primarily to purchases of investments of $28.3 billion, acquisitions (net of cash acquired) of $3.6 billion, changes in funds receivable from customers of $1.1 billion, and purchases of property and equipment of $640 million.

These cash outflows were partially offset by maturities and sales of investments of $19.7 billion, changes in principal loans receivable, net of $523 million, and proceeds from the sale of property and equipment of $120 million.

The net cash used in investing activities of $5.3 billion in the nine months ended September 30, 2019 was due primarily to purchases of investments of $19.8 billion, changes in funds receivable from customers of $1.3 billion, changes in principal loans receivable, net of $1.1 billion, and purchases of property and equipment of $530 million.

These cash outflows were partially offset by maturities and sales of investments of $17.4 billion.

Financing Activities

We generated cash from financing activities of $8.5 billion in the six months ended June 30, 2020 due primarily to $7.0 billion of cash proceeds from the issuance of long-term debt in the form of fixed rate notes as well as proceeds from borrowings under our Credit Agreement and changes in funds payable and amounts due to customers of $5.9 billion.

We generated cash from financing activities of $10.0 billion in the nine months ended September 30, 2020 due primarily to changes in funds payable and amounts due to customers of $7.8 billion and $7.0 billion of cash proceeds from the issuance of long-term debt in the form of fixed rate notes as well as proceeds from borrowings under our Credit Agreement.

These cash inflows were partially offset by the repayment of outstanding borrowings under our Credit Agreement of $3.0 billion, the repurchase of $1.4 billion of our common stock under our stock repurchase programs, and tax withholdings related to net share settlement of equity awards of $463 million.

We generated cash from financing activities of $2.5 billion in the six months ended June 30, 2019 due primarily to changes in funds payable and amounts due to customers of $3.1 billion and borrowings under a prior credit agreement of $500 million, partially offset by the repurchase of $756 million of our common stock under our stock repurchase programs and tax withholdings related to net share settlement of equity awards of $449 million.

We generated cash from financing activities of $3.8 billion in the nine months ended September 30, 2019 due primarily to $5.5 billion of cash proceeds from the issuance of long-term debt in the form of fixed rate notes as well as borrowings under a prior credit agreement, and changes in funds payable and amounts due to customers of $2.4 billion.

These cash inflows were partially offset by repayment of $2.5 billion of borrowings under a prior credit agreement, the repurchase of $1.1 billion of our common stock under our stock repurchase programs, and tax withholdings related to net share settlement of equity awards of $473 million.

Effect of Exchange Rates on Cash, Cash Equivalents, and Restricted Cash

Foreign currency exchange rates had a negative impact of $72 million on cash, cash equivalents, and restricted cash for the six months ended June 30, 2020 due to the strengthening of the U.S.

dollar against certain foreign currencies, primarily the Brazilian real.

Foreign currency exchange rates had a positive impact of $26 million and negative impact of $49 million on cash, cash equivalents, and restricted cash for the nine months ended September 30, 2020 and 2019, respectively, due primarily to fluctuations in the exchange rate of the U.S.

dollar to the Australian dollar.

Off-Balance Sheet Arrangements

As of June 30, 2020, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.

As of September 30, 2020, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Policies and Estimates

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total TPV, current and projected macroeconomic conditions, including unemployment rates and merchant insolvency events, changes to and usage of our customer protection programs, the impact of regulatory changes, and the credit quality of loans receivable arising from transactions funded with our credit products, which include our PayPal Credit consumer products and merchant loans and advances arising from our PPWC and PPBL products.

We establish allowances for estimated transaction losses arising from processing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery of goods or services, buyer protection program claims, and account takeovers.

We establish allowances for negative customer balances and estimated transaction losses arising from processing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery of goods or services, buyer protection program claims, and account takeovers.

Additions to the allowance, in the form of provisions, are reflected in transaction and credit losses on our condensed consolidated statements of income.

The allowances are monitored regularly and are updated based on actual claims data.

The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving loss payment patterns, the mix of transaction and loss types, as well as current and projected macroeconomic factors, as appropriate.

The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving loss payment and write-off patterns, the mix of transaction and loss types, as well as current and projected macroeconomic factors, as appropriate.

We also establish an allowance for loans and interest receivable, which represents our estimate of lifetime expected credit losses inherent in our portfolio of loans and interest receivable.

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Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our consumer and merchant receivables.

Further, we may include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our expected lifetime losses.

Our consumer receivables are primarily revolving in nature and do not have a contractual term, however the reasonable and supportable forecast period we have included in our projected loss rates based on externally sourced data is approximately seven years.

Our merchant receivables vary in contractual term, however the reasonable and supportable forecast period considered for projected loss rates is approximately 2.5 to 3.5 years, dependent upon the product.

Further, we include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our expected lifetime losses.

While our consumer receivables are primarily revolving in nature and do not have a contractual term, the reasonable and supportable forecast period we have included in our projected loss rates based on externally sourced data is approximately seven years.

Our merchant receivables also vary in contractual term, and the reasonable and supportable forecast period we have considered for projected loss rates is approximately 2.5 to 3.5 years, dependent upon the product.

The allowance for loss against the interest and fees receivable is determined primarily by applying loss curves by geography, delinquency, and period of origination, among other factors.

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These forecasts project scenarios for future unemployment and benchmark credit card charge-off rates.

As of June 30, 2020, we utilized externally published projections indicating a forecasted peak U.S.

unemployment rate over the reasonable and supportable period of approximately 14% in the second quarter of 2020, resulting in an overall principal and interest coverage ratio of approximately 22%.

As of September 30, 2020, we utilized externally published projections indicating a gradual decline in forecasted U.S.

unemployment rates as well as forecasted credit card charge-off rates over the reasonable and supportable period, following peak unemployment rates of approximately 14% and 10% in the second and third quarters of 2020, respectively, resulting in an overall principal and interest coverage ratio of approximately 24%.

The projected gradual decline in unemployment and credit card charge-off rates is reflective of a prolonged recovery period where we may experience elevated charge-off rates.

A significant change in the forecasted macroeconomic factors could result in a material change in our allowances.

Our allowance as of June 30, 2020 has been adjusted to account for the proactive and reactive measures that we have taken that are intended to reduce financial difficulties experienced by our customers.

Our allowance as of September 30, 2020 has been adjusted to account for the proactive and reactive measures that we have taken that are intended to reduce financial difficulties experienced by our customers, and other limitations in our expected credit loss models that have arisen due to the extreme fluctuations in both the actual and projected macroeconomic conditions during the period.

These qualitative adjustments were made to incorporate varying degrees of merchant performance both in the current environment as well as expected future performance, and to account for payment holidays granted.

Our allowance as of June 30, 2020 has not been adjusted to account for the potential impacts of the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act”, which are also intended to help mitigate the negative impact the current pandemic may have on the financial condition of our customers.

Our allowance as of September 30, 2020 has not been adjusted to account for the potential impacts of the CARES Act, which are also intended to help mitigate the negative impact the current pandemic may have on the financial condition of our customers.

We are unable to predict the ultimate impact of these actions which may result in adjustments to our allowance for loans and interest receivable in future periods.

An increase of 1% in the principal and interest coverage ratio would increase our allowances by approximately $39 million based on the loans and interest receivable balance outstanding as of June 30, 2020.

An increase of 1% in the principal and interest coverage ratio would increase our allowances by approximately $34 million based on the loans and interest receivable balance outstanding as of September 30, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis