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Item 7. Management’s Discussion and Analysis

2021-02-05 compared with 2020-02-06 · 312 added, 250 removed, 249 unchanged (69% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans, or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, or management strategies).

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans, or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, mergers or acquisitions, or management strategies).

Additionally, our forward-looking statements include expectations related to anticipated impacts of the outbreak of the novel coronavirus.

These forward-looking statements can be identified by words such as “may,” “will,” “would,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “project,” “forecast,” and other similar expressions.

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Such risks and uncertainties include, among others, those discussed in “Item 1A.

Risk Factors” of this Annual Report on Form 10-K, as well as in our consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission (“SEC”).

Risk Factors” of this Form 10-K, as well as in our consolidated financial statements, related notes, and the other information appearing in this report and our other filings with the Securities and Exchange Commission (“SEC”).

We do not intend, and undertake no obligation except as required by law, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

You should read the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the audited consolidated financial statements and the related notes that appear elsewhere in this report.

Unless otherwise expressly stated or the context otherwise requires, references to “we,” “our,” “us,” “the Company” and “PayPal” refer to PayPal Holdings and its consolidated subsidiaries.

Unless otherwise expressly stated or the context otherwise requires, references to “we,” “our,” “us,” “the Company,” and “PayPal” refer to PayPal Holdings, Inc.

and its consolidated subsidiaries.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations focuses on discussion of 2020 results as compared to 2019 results.

For discussion of 2018 results as compared to 2017 results, see “Exhibit 99.1—Revised Management’s Discussion and Analysis of Financial Condition and Results of Operations and Consolidated Financial Statements for the years ended December 31, 2018, 2017 and 2016—Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Form 8-K filed on September 16, 2019.

For discussion of 2019 results as compared to 2018 results, see “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Form 10-K for the year ended December 31, 2019 filed with the SEC on February 6, 2020.

BUSINESS ENVIRONMENT

We are a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide.

PayPal is committed to democratizing financial services and empowering people and businesses to join and thrive in the global economy.

Our goal is to enable our consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform, and using any device.

We also facilitate person-to-person (“P2P”) payments through our PayPal, Venmo, and Xoom products.

Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products, comprise our proprietary Payments Platform.

We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry.

That focus continues to become even more heightened as regulators on a global basis focus on important issues such as countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection.

Some of the laws and regulations to which we are subject were enacted recently, and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation.

New or changing laws and regulations, including the way laws and regulations are interpreted and implemented, as well as increased penalties and enforcement actions related to non-compliance, could have a material adverse impact on our business, results of operations, and financial condition.

Therefore, we monitor these areas closely to design compliant solutions for our customers who depend on us.

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

We are not immune to these risks and there can be no assurance that we will not suffer such losses in the future.

We are a leading technology platform and digital payments company that enables digital and mobile payments on behalf of merchants and consumers worldwide.

PayPal is committed to democratizing financial services to improve the financial health of individuals and to increase economic opportunity for entrepreneurs and businesses of all sizes around the world.

Our goal is to enable our merchants and consumers to manage and move their money anywhere in the world, anytime, on any platform, and using any device when sending payments or getting paid.

We also facilitate person-to-person (“P2P”) payments through our PayPal, Venmo, and Xoom products and services and simplify and personalize shopping experiences for our consumers through our Honey Platform.

Our combined payment solutions, including our core PayPal, PayPal Credit, Braintree, Venmo, Xoom, iZettle, and Hyperwallet products and services, comprise our proprietary Payments Platform.

Regulatory Environment

We operate globally and in a rapidly evolving regulatory environment characterized by a heightened focus by regulators globally on all aspects of the payments industry, including countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection.

The laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation.

New or changing laws and regulations, including the changes to their interpretation and implementation, as well as increased penalties and enforcement actions related to non-compliance, could have a material adverse impact on our business, results of operations, and financial condition.

We monitor these areas closely and are focused on designing compliant solutions for our customers.

Information Security

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

Although we have developed systems and processes designed to protect the 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 “Item 1A.

Risk Factors— Cyberattacks and security vulnerabilities could result in serious harm to our reputation, business, and financial condition.

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 on January 31, 2020 and a transition period is 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.

There is a significant lack of clarity over the terms of the U.K.’s future relationship with the EU after that date.

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.

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

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 restrictions, border closures, quarantines, shelter-in-place and lock-down orders, mask and social distancing requirements, 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, or business partners.

While the current macroeconomic environment as a result of the COVID-19 pandemic 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.

cash) towards e-commerce and digital payments and resulted in increased customer demand for safer payment and delivery solutions (e.g.

contactless payment methods, buy online and pick up in store) and a significant increase in online spending in certain verticals that have historically had a strong in-store presence.

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 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 pandemic 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 I, Item 1A, Risk Factors” in this Form 10-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”) with the expiration of a transition period on December 31, 2020.

PayPal (Europe) S.à.r.l.

et Cie, SCA (“PayPal (Europe)”) operates in the U.K.

within the scope of its passport permissions (as they stood at the end of the transition period) under the Temporary Permissions Regime pending the grant of new U.K.

authorizations by the U.K.

financial regulators.

We are currently unable to determine the longer-term impact that Brexit will have on our business, which will depend, in part, on the implications of new tariff, trade and regulatory frameworks that now govern the provision of cross-border goods and services between the U.K.

and the EEA, as well as the financial and operational consequences of the requirement for PayPal (Europe) to obtain new U.K.

authorizations to operate its business longer-term within the U.K.

For additional information on how Brexit could affect our business, see “Item 1A.

Risk Factors— The United Kingdom’s departure from the EU could adversely affect us .”

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.

Risk Factors— Brexit:

The United Kingdom’s departure from the EU could harm our business, financial condition, and results of operations .”

Brexit may 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.

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In 2020, 2019, and 2018, net revenues generated from the EU (excluding the U.K.) constituted less than 20% of total net revenues.

Approximately 37% and 31% of our gross loans and interest receivables as of December 31, 2019 and 2018 , respectively, were generated from our U.K.

Approximately 6% and 7% of our gross loans and interest receivables as of December 31, 2019 and 2018 , respectively, were generated from the EU (excluding the U.K.).

Approximately 50% and 37% of our gross loans and interest receivables as of December 31, 2020 and 2019, respectively, were due from customers in the U.K.

Approximately 14% and 6% of our gross loans and interest receivables as of December 31, 2020 and 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 December 31, 2020 as compared to 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 credit portfolio as compared to 2019.

OVERVIEW OF RESULTS OF OPERATIONS

The following table provides a summary of our consolidated financial results for the years ended December 31, 2020, 2019, and 2018:

Year Ended December 31,

Percent Increase/(Decrease)

Year Ended December 31, Percent Increase/(Decrease)

2020 2019 2018 2020 2019

(In millions, except percentages and per share amounts)

Net revenues $ 21,454 $ 17,772 $ 15,451 21 % 15 %

Operating expenses 18,165 15,053 13,257 21 % 14 %

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Effective tax rate 17 % 18 % 13 % ** **

Net income $ 4,202 $ 2,459 $ 2,057 71 % 20 %

Net income per diluted share $ 3.54 $ 2.07 $ 1.71 71 % 21 %

Net cash provided by operating activities (1)

$ 5,854 $ 4,071 $ 5,480 44 % (26) %

All amounts in tables are rounded to the nearest million, except as otherwise noted.

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** Not Meaningful

Net revenues increased $2.3 billion , or 15% , in 2019 as compared to 2018 , driven primarily by growth in TPV (as defined below under “Net Revenues”) of 23% .

Net revenues from our acquisitions completed in 2018 contributed approximately one percentage point to the growth rate in 2019 .

These increases were partially offset by a decrease in interest and fee income due to the sale of our U.S.

consumer credit receivables portfolio to Synchrony Bank (“Synchrony”) in July 2018, which resulted in a negative impact of approximately four percentage points to the net revenues growth rate in 2019 .

Total operating expenses increased $1.8 billion , or 14% , in 2019 as compared to 2018 , due primarily to an increase in transaction expense, and to a lesser extent, technology and development, customer support and operations, and general and administrative expenses, partially offset by a decline in restructuring and other charges.

Operating expenses related to our acquisitions completed in 2018 contributed approximately three percentage points to the growth rate in total operating expenses in 2019 .

Operating income increased $525 million , or 24% , in 2019 as compared to 2018 .

Acquisitions completed in 2018 had a negative impact of approximately five percentage points to the 2019 growth rate in operating income.

Our operating margin was 15% and 14% in 2019 and 2018 , respectively.

Operating margin in 2019 was positively impacted by a reduction in restructuring and other charges driven primarily by the completion of the sale of our U.S.

consumer credit receivables portfolio in July 2018, subsequent to which we no longer record adjustments to the cost basis of loans and interest receivables held for sale, offset by a negative impact of growth in our transaction expense, which increased 22% in 2019 , compared to a 15% increase in net revenues in the same period.

Acquisitions completed in 2018 had a negative impact of approximately one percentage point in our operating margin for the year ended December 31, 2019 .

Net income increased by $402 million , or 20% , in 2019 as compared to 2018 , due to an increase in operating income of $525 million and an increase in other income (expense), net of $97 million , driven primarily by net unrealized gains on strategic investments, partially offset by an increase in income tax expense of $220 million .

(1) Prior period amounts have been revised to conform to the current period presentation.

Refer to “Note 1—Overview and Summary of Significant Accounting Policies” to our consolidated financial statements included in this Form 10-K for additional information.

Net revenues increased $3.7 billion, or 21%, in 2020 as compared to 2019 driven primarily by growth in total payment volume (“TPV”, as defined below under “Net Revenues”) of 31%.

Our acquisition of Honey Science Corporation (“Honey”) contributed approximately one percentage point to the growth rate in 2020.

Total operating expenses increased $3.1 billion, or 21%, in 2020 as compared to 2019 due primarily to an increase in transaction expense, and to a lesser extent, increases in technology and development expenses, sales and marketing expenses, transaction and credit losses, 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 five percentage points to the growth rate in total operating expenses in 2020.

Operating income increased $570 million, or 21%, in 2020 as compared to 2019 due to growth in net revenues, partially offset by an increase in operating expenses.

Our operating margin was 15% in both 2020 and 2019.

Our acquisitions of Honey and GoPay collectively had a negative impact of approximately three percentage points to our operating margin, which was offset by operating efficiencies.

Net income increased by $1.7 billion, or 71%, in 2020 as compared to 2019 due to the previously discussed increase in operating income of $570 million and an increase in other income (expense), net of $1.5 billion, driven primarily by net gains on strategic investments, partially offset by an increase in income tax expense of $324 million, driven primarily by tax expense related to gains on strategic investments.

IMPACT OF FOREIGN CURRENCY EXCHANGE RATES

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In 2020, 2019, and 2018, we generated approximately 49%, 47%, and 46% of our net revenues from customers domiciled outside of the United States, respectively.

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

as discussed under “Item 1A.

Risk Factors— Risk Factors That May Affect Our Business, Results of Operations, and Financial Condition .”

We calculate the year-over-year impact of foreign currency movements on our business using prior period foreign currency exchange rates applied to current period transactional currency amounts.

While changes in foreign currency exchange rates affect our reported results, we have a foreign currency exchange exposure management program whereby we designate certain foreign currency exchange contracts as cash flow hedges intended to reduce the impact on earnings from foreign currency exchange rate movements.

Because we generate substantial net revenues internationally, we are subject to the risks of doing business outside of the U.S., including those discussed under “Item 1A.

Risk Factors.”

We calculate the year-over-year impact of foreign currency exchange movements on our business using prior period foreign currency exchange rates applied to current period transactional currency amounts.

While changes in foreign currency exchange rates affect our reported results, we have a foreign currency exchange exposure management program in which we designate certain foreign currency exchange contracts as cash flow hedges intended to reduce the impact on earnings from foreign currency exchange rate movements.

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.

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(In millions)

(Unfavorable) favorable impact to net revenues (exclusive of hedging impact)

Favorable (unfavorable) impact to net revenues (exclusive of hedging impact) $ 66 $ (316)

Hedging impact 20 238

(Unfavorable) favorable impact to net revenues

Favorable (unfavorable) impact to operating expense

Favorable (unfavorable) impact to net revenues 86 (78)

Favorable impact to operating expense 4 158

Net favorable impact to operating income $ 90 $ 80

While we enter into foreign currency exchange contracts to help reduce the impact on earnings from foreign currency exchange rate movements, it is impossible to predict or eliminate the total effects of this exposure.

We also use a foreign currency exchange contract, designated as a net investment hedge, to reduce the foreign currency risk related to our investment in a foreign subsidiary.

We also used a foreign currency exchange contract, designated as a net investment hedge, to reduce the foreign currency exchange risk related to our investment in a foreign subsidiary.

Gains and losses associated with this instrument will remain in accumulated other comprehensive income until the foreign subsidiary is sold or substantially liquidated.

Additionally, in connection with our services that are paid for in multiple currencies, we generally set our foreign currency exchange rates daily and may face financial exposure if we incorrectly set our foreign currency exchange rates or as a result of fluctuations in foreign currency exchange rates between the times that we set our foreign currency exchange rates.

Given that we also have foreign currency exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries, we have an additional foreign currency exchange exposure management program whereby we use foreign currency exchange contracts to offset the impact of foreign currency exchange rate movements on our assets and liabilities.

Given that we also have foreign currency exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries, we have an additional foreign currency exchange exposure management program in which we use foreign currency exchange contracts to offset the impact of foreign currency exchange rate movements on our assets and liabilities.

The foreign currency exchange gains and losses on our assets and liabilities are recorded in other income (expense), net, and are offset by the gains and losses on the foreign currency exchange contracts.

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• Transaction revenues :

Net transaction fees charged to merchants and consumers on a transaction basis primarily based on the volume of activity, or Total Payment Volume (“TPV”), completed on our Payments Platform.

Net fees charged to merchants and consumers on a transaction basis primarily based on the TPV completed on our Payments Platform.

Growth in TPV is directly impacted by the number of payment transactions that we enable on our Payments Platform.

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

We earn additional fees on transactions where we perform currency conversion, when we enable cross-border transactions (i.e., transactions where the merchant and consumer are in different countries), to facilitate the instant transfer of funds for our customers from their PayPal or Venmo account to their debit card or bank account, and other miscellaneous fees.

Other value added services :

Net revenues derived primarily from revenue earned through partnerships, subscription fees, gateway fees, and other services we provide to our merchants and consumers.

We also earn revenues from interest and fees earned primarily on our portfolio of merchant and consumer loans receivable, and interest earned on certain PayPal customer account balances.

• Revenues from other value added services:

Net revenues derived primarily from revenue earned through partnerships, referral fees, subscription fees, gateway fees, and other services we provide to our merchants and consumers.

We also earn revenues from interest and fees earned primarily on our portfolio of loans receivable, and interest earned on certain assets underlying customer balances.

Our revenues can be significantly impacted by the following:

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• The amount of our loans receivable outstanding with merchants and consumers.

Net revenues analysis

The components of our net revenue for the years ended December 31, 2019 , 2018 and 2017 were as follows:

Year Ended December 31,

Percent Increase/

(In millions, except percentages)

Transaction revenues

Other value added services

Transaction revenues

Transaction revenues increased by $2.4 billion , or 17% , in 2019 compared to 2018 , due primarily to growth in TPV, mainly from our PayPal, Braintree, and Venmo products, and growth in the number of payment transactions, both of which resulted primarily from an increase in our active accounts.

Fees charged to facilitate instant transfer of funds for our customers contributed approximately two percentage points and acquisitions completed in 2018 contributed approximately one percentage point to the growth rate of transaction revenues in 2019 .

Net gains from our foreign currency exchange contracts recognized as a component of transaction revenues in 2019 were $238 million , compared to net losses of $23 million in 2018 .

Refer to “Note 10—Derivative Instruments” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information on our foreign currency exposure management program.

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

Year Ended December 31,

Percent Increase/

(In millions, except percentages and payment transactions per active account)

Active accounts (1)

Number of payment transactions (2)

Payment transactions per active account (3)

Percent of cross-border TPV

All amounts in tables are rounded to the nearest million except as otherwise noted.

As a result, certain amounts may not recalculate using the rounded amounts provided.

(1) Reflects active accounts as of the end of the applicable period.

An active account is an account registered directly with PayPal or a platform access partner that has completed a transaction on our Payments Platform, not including gateway-exclusive transactions, within the past 12 months.

Active accounts, number of payment transactions, number of payment transactions per active account, and TPV are key non-financial performance metrics (“key metrics”) that management uses to measure the performance of our business, and are defined as follows:

• An active account is an account registered directly with PayPal or a platform access partner that has completed a transaction on our Payments Platform or through our Honey Platform, not including gateway-exclusive transactions, within the past 12 months.

A platform access partner is a third party whose customers are provided access to PayPal’s Payments Platform through such third party’s login credentials.

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.

• 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.

• Number of payment transactions per active account reflects the total number of payment transactions within the previous 12-month period, divided by active accounts at the end of the period.

(4) TPV is the value of payments, net of reversals, successfully completed on our Payments Platform or enabled by PayPal via a partner payment solution, not including gateway-exclusive transactions.

The number of payment transactions per active account provides management with insight into the number of times a customer is engaged in payments activity on our Payments Platform in a given period.

• TPV is the value 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.

As our transaction revenue is typically correlated with TPV growth and the number of payment transactions completed on our Payments Platform, management uses these metrics to gain insights into the scale and strength of our Payments Platform, the engagement level of our customers, and underlying activity and trends which are indicators of current and future performance.

We present these key metrics to enhance investors’ evaluation of the performance of our business and operating results.

Net Revenue Analysis

The components of our net revenue for the years ended December 31, 2020, 2019 and 2018 were as follows (in millions):

Transaction revenues

Transaction revenues increased by $3.8 billion, or 24%, in 2020 compared to 2019 and were 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.

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

However, we have experienced strong growth in online retail, gaming, and food volume, offsetting this decline.

The graphs below present the respective key metrics (in millions) for the years ended December 31, 2020, 2019, and 2018:

*Reflects active accounts at the end of the applicable period.

Active accounts as of December 31, 2020 includes 10.2 million active accounts contributed by Honey on the date of acquisition in January 2020.

The following table provides a summary of related metrics:

Year Ended December 31, Percent Increase/

2020 2019 2018 2020 2019

Payment transactions per active account 40.9 40.6 36.9 1 % 10 %

Percent of cross-border TPV 17 % 18 % 19 % ** **

** Not meaningful

Transaction revenues grew more slowly than both TPV and the number of payment transactions in 2019 compared to 2018 due primarily to a higher proportion of P2P transactions (primarily from our Venmo and PayPal products) from which we earn lower fees, and a lower proportion of cross border transactions, partially offset by foreign currency exchange hedging gains.

Transaction revenues grew more slowly than TPV, which grew 31%, and the number of payment transactions, which grew 25%, in 2020 compared to 2019 due primarily to a higher proportion of P2P transactions (primarily from our Venmo products) from which we earn lower fees, a decline in hedging gains, and a higher portion of TPV generated by platform partners and large merchants who generally pay lower rates with higher transaction volumes.

Changes in prices charged to our customers did not significantly impact transaction revenue growth in 2020.

Other value added services

Net revenues from other value added services decreased by $69 million , or 4% , in 2019 compared to 2018 due primarily to lower interest and fee income earned on our consumer loans receivable driven by the sale of our U.S.

consumer credit receivables portfolio in July 2018.

The decline was partially offset by an increase in revenue share with Synchrony (discussed below), an increase in interest and fee income earned on our merchant loans and advances receivable, and an increase in interest earned resulting from growth in customer balances.

Other value added services revenues included approximately $113 million and $109 million for the year ended December 31, 2019 and December 31, 2018, respectively, due to revenue earned from transition servicing activities provided to Synchrony, which ended in the second quarter of 2019.

Acquisitions completed in 2018 contributed approximately four percentage points to the growth rate of other value added services revenues in 2019 .

The total gross consumer and merchant loans receivable balance, including loans and receivable held for sale, as of December 31, 2019, 2018, and 2017 was $4.2 billion , $2.7 billion , and $7.8 billion, respectively.

The year-over-year increase of 56% in 2019 compared to 2018 , was driven by an increase in both our merchant loans and international consumer loan portfolios.

The year-over-year decrease of 66% in 2018 compared to 2017, was driven by the completion of the sale of U.S.

consumer credit receivables portfolio.

In November 2017, we reached an agreement to sell our U.S.

consumer credit receivables portfolio to Synchrony to free up balance sheet capacity and cash flow for other uses and mitigate balance sheet risk.

Following the closing of this transaction in July 2018, Synchrony became the exclusive issuer of the PayPal Credit online consumer financing program in the U.S., and we no longer hold an ownership interest in the receivables generated through the program.

Subsequent to the sale, we earn a revenue share on the portfolio of consumer receivables owned by Synchrony, which is recorded in net revenues from other value added services.

Revenues from other value added services

Revenues from other value added services decreased by $137 million, or 8%, in 2020 compared to 2019 due primarily to a decline in interest earned on certain assets underlying customer account balances resulting from lower interest rates and a decrease in interest and fee income on our loans and advances receivable due to an increase in the allowance for expected credit losses against interest and fees receivable, a decline in originations, and payment holidays that we provided during the year to our customers as a part of our COVID-19 payment relief initiatives.

Additionally, the decline in revenues from other value added services was driven by a decline in revenue earned from transition servicing activities provided to Synchrony Bank (“Synchrony”), which ended in the second quarter of 2019.

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 other value added services in 2020, and an increase in our revenue share earned from Synchrony.

The total gross consumer and merchant loans receivable balance as of December 31, 2020 and 2019 was $3.6 billion and $4.2 billion, respectively.

The year-over-year decrease of 15% in 2020 compared to 2019 was driven 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 pandemic, 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 were intended to reduce financial difficulties experienced by our customers and included providing payment holidays to grant payment deferrals to certain borrowers for varying periods of time, and amended payment terms through loan modifications 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 pandemic, 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 their prospective impact on our interest and fee income is not determinable.

In addition, consumers that have outstanding loans and interest receivable due to Synchrony 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.

In the event the overall return on the PayPal branded credit programs funded by Synchrony does not meet a minimum rate of return (“minimum return threshold”) in a particular quarter, our revenue share for that period would be zero.

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 December 31, 2020, the overall return on the PayPal branded credit programs funded by Synchrony exceeded the minimum return threshold.

OPERATING EXPENSES

Beginning with the first quarter of 2019, we reclassified certain operating expenses within our consolidated statements of income.

Prior period amounts were reclassified to conform to this presentation.

These changes have no impact on our previously reported consolidated net income for prior periods, including total operating expenses, financial position, or cash flows for any periods presented.

For additional information, see “Note 1—Overview and Summary of Significant Accounting Policies” in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Growth rates presented below are calculated based upon the reclassified prior period amounts.

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

Year Ended December 31,

Percent Increase/

Year Ended December 31, Percent Increase/

2020 2019 2018 2020 2019

(In millions, except percentages)

Transaction expense $ 7,934 $ 6,790 $ 5,581 17 % 22 %

Transaction and loan losses

Transaction and credit losses 1,741 1,380 1,274 26 % 8 %

Customer support and operations 1,778 1,615 1,407 10 % 15 %

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Transaction expense rate (1)

Transaction and loan loss rate (3)

(1) Prior period amounts have been revised to reflect the classification changes discussed above.

0.85 % 0.95 % 0.96 % ** **

Transaction and credit loss rate (2)

0.19 % 0.19 % 0.22 % ** **

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

(3) Transaction and loan loss rate is calculated by dividing transaction and loan losses by TPV.

(2) Transaction and credit loss rate is calculated by dividing transaction and credit losses by TPV.

** Not meaningful.

Transaction expense

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Transaction expense also includes fees paid to disbursement partners to enable a transaction.

We refer to the allocation of funding sources used by our consumers as our “funding mix.” 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 account balance, a Venmo account balance, or PayPal Credit.

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.

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than in the U.S.

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.

Transaction expense increased by $1.2 billion , or 22% , in 2019 compared to 2018 , primarily attributable to an increase in TPV of 23% .

Acquisitions completed in 2018 contributed approximately one percentage point to the growth rate of transaction expense in 2019.

The decrease in transaction expense rate in 2019 compared to 2018 was due primarily to changes in product mix.

Our transaction expense rate is impacted by changes in product mix, merchant 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.

Macroeconomic environment changes may also result in behavioral shifts in consumer spending patterns affecting the type of funding source they use, which also impacts the funding mix.

Transaction expense increased by $1.1 billion, or 17%, in 2020 compared to 2019 and was primarily attributable to an increase in TPV of 31%.

The decrease in transaction expense rate in 2020 compared to 2019 was due primarily to favorable changes in product mix and funding mix.

For the years ended December 31, 2020, 2019, and 2018, approximately 2% of TPV was funded with PayPal Credit.

For the years ended December 31, 2020, 2019, and 2018, approximately 40%, 41%, and 43% of TPV, respectively, was generated outside of the U.S.

Transaction and loan losses

Transaction and credit losses

Transaction losses include the expense associated with our buyer and seller protection programs, fraud, and chargebacks.

Loan losses include the losses associated with our merchant and consumer loans receivable portfolio, except loans and interest receivable, held for sale.

Our transaction and loan losses fluctuate depending on many factors, including TPV, macroeconomic conditions, changes to our customer protection programs, the impact of regulatory changes, and the credit quality of loans receivable arising from transactions funded with our credit products for consumers and loans and advances to merchants.

The components of our transaction and loan losses for the years ended December 31, 2019 , 2018 , and 2017 were as follows:

Year Ended December 31,

Percent Increase/(Decrease)

(In millions, except percentages)

Transaction losses

Transaction and loan losses

Transaction loss rate (1)

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

Transaction and loan losses increased by $106 million , or 8% , in 2019 compared to 2018 .

Credit losses include the losses associated with our merchant and consumer loans receivable portfolio.

Beginning in 2020, these losses are based on current expected credit losses.

Our transaction and credit losses fluctuate depending on many factors, including TPV, current and projected macroeconomic conditions including unemployment rates, 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 for consumers and loans and advances to merchants.

The components of our transaction and credit losses (in millions) for the years ended December 31, 2020, 2019, and 2018 were as follows:

Transaction and credit losses increased by $361 million, or 26%, in 2020 compared to 2019.

Transaction loss rate (transaction losses divided by TPV) was 0.12%, 0.15%, and 0.18% for the years ended December 31, 2020, 2019, and 2018, respectively.

Transaction losses increased by $43 million, or 4%, in 2020 compared to 2019 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 over the same period.

Loan losses increased by $73 million , or 34% , in 2019 compared to 2018 , due primarily to growth in our merchant loans and advances and international consumer loans receivable balances, partially offset by the recognition of losses in 2018 associated with U.S.

consumer credit receivable balances that were not subject to the sale agreement with Synchrony.

Acquisitions completed in 2018 contributed approximately three percentage points to the growth rate of loan losses for 2019 .

The consumer loans receivable balance as of December 31, 2019 and 2018 was $1.3 billion and $704 million , respectively.

The year-over-year increase of 88% in 2019 compared to 2018 was due to growth in international markets.

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

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 increased by $318 million, or 110%, in 2020 compared to 2019 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.

Our estimate of the macroeconomic impact on current 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 we expect to charge off in the future.

Credit losses for the year ended December 31, 2020 include the impact of the increase in actual unemployment rates and credit card charge-off 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 December 31, 2020, the credit losses recognized in future periods will be impacted.

The consumer loans and interest receivables balance as of December 31, 2020 and 2019 was $2.2 billion and $1.3 billion, respectively.

The year-over-year increase of 64% in 2020 compared to 2019 was due to growth of PayPal Credit in international markets and, to a lesser extent, growth of our installment credit products in the U.S.

and international markets.

Approximately 77% and 94% of our consumer loans receivables outstanding as of December 31, 2020 and 2019, respectively, were due from consumers in the U.K.

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

97.9 % 96.7 %

Percent of consumer loans and interest receivables > 90 days outstanding (1), (2), (3)

Net charge off rate (4)

(1) Prior period revised to conform to the current period presentation.

(2) Includes the impact of payment holidays provided by the Company as a part of our COVID-19 payment relief initiatives.

(3) Represents percentage of balances which are 90 days past the billing date to the consumer.

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

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

(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 decrease in the net charge off rate for consumer receivables at December 31, 2020 as compared to December 31, 2019 was primarily attributable to the continued expansion and maturity of our international consumer loan receivable portfolio and was in-part favorably impacted in the current year by payment holidays provided by the Company as a part of our COVID-19 payment relief initiatives.

We offer access to credit products for certain small and medium-sized merchants, which we refer to as our merchant lending offerings.

Total merchant loans, advances, and interest and fees receivable outstanding, net of participation interest sold, as of December 31, 2020 and 2019 were $1.4 billion and $2.8 billion, respectively.

The year-over-year increase of 50% in 2019 compared to 2018 was due to growth in our PayPal Business Loan portfolio and an increase in the availability of our PayPal Working Capital product.

The year-over-year decrease of 51% in 2020 compared to 2019 was due primarily to a reduction in originations due to modifications in our acceptable risk parameters as well as a shift towards merchants borrowing 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 loans originated through the PPP.

Approximately 81% and 10% of our merchant receivables outstanding as of December 31, 2020 were due from merchants in the U.S.

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

Merchant loans and advances

Percent of merchant receivables within original expected or contractual repayment period 75.4 % 89.6 %

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

(1) Excludes $30 million of loan receivables related to iZettle merchant receivables.

Modifications to the acceptable risk parameters of our PayPal credit products for the periods presented did not have a material impact on our loans and interest receivables.

Net charge off rate (2)

(1) Includes the impact of payment holidays and modification programs provided by the Company as a part of our COVID-19 payment relief initiatives.

(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, increase in percent of merchant receivables greater than 90 days outstanding, and increase in the net charge off rate for merchant receivables at December 31, 2020 as compared to December 31, 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 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 our 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 significant changes in their structure, including repayment terms and fee/rate structure.

For additional information, see “Note 11—Loans and Interest Receivable” in the notes to our consolidated financial statements included in this Form 10-K.

During the year ended December 31, 2020, modifications to the acceptable risk parameters of our credit products in response to the impacts of the COVID-19 pandemic 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 December 31, 2020, as compared to 2019.

While the impact of COVID-19 on the economic environment remains uncertain, the longer and more severe the pandemic, 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.

For additional information, see “Note 11—Loans and Interest Receivable” in the notes to the consolidated financial statements, and “Item 1A.

Risk Factors— Some of our credit products expose us to additional risks .” included elsewhere in this Annual Report on Form 10-K.

Risk Factors— Our credit products expose us to additional risks .” included in this Form 10-K.

Customer support and operations

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Customer support and operations costs increased $163 million, or 10%, in 2020 compared to 2019.

The increase in 2019 was primarily attributable to an increase in employee-related expenses in our operations function that support the growth of our active accounts and payment transactions, and an increase in depreciation and amortization expenses associated with the applications that we use to support our customers and underlying data in our operations centers.

Our acquisitions completed in 2018 contributed approximately three percentage points to the growth rate of customer support and operations costs in 2019 .

The increase in 2020 was primarily attributable to an increase in employee-related expenses and contractors and consulting costs mainly 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 includes costs incurred for customer acquisition, business development, advertising, and marketing programs.

Sales and marketing expenses increased $87 million , or 7% , in 2019 compared to 2018 , due primarily to increases in employee-related expenses, amortization of acquired intangibles, and consulting services, partially offset by lower spend on marketing programs.

Our acquisitions completed in 2018 contributed approximately eight percentage points to the growth rate of sales and marketing expenses in 2019 , primarily due to amortization of acquired intangibles.

Sales and marketing expenses increased $460 million, or 33%, in 2020 compared to 2019 due primarily to higher spend on marketing programs and employee-related expenses.

Our acquisitions of Honey and GoPay collectively contributed approximately 20 percentage points to the growth rate of sales and marketing expenses in 2020.

Technology and development

Technology and development includes (a) costs incurred in connection with the development of our Payments Platform, new products, and the improvement of our existing products, including the amortization of software and website development costs incurred in developing our Payments Platform, which are capitalized, and acquired developed technology, and (b) our site operations and other infrastructure costs incurred to support our Payments Platform.

Technology and development expenses increased $254 million , or 14% , in 2019 compared to 2018 , due primarily to increase s in employee-related expenses, and to a lesser extent in data center and cloud computing services utilized in delivering our products, and amortization of acquired intangibles, partially offset by a decline in costs related to contractors and consultants.

Our acquisitions completed in 2018 contributed approximately four percentage points to the growth rate of technology and development expenses in 2019 .

Technology and development expenses increased $557 million, or 27%, in 2020 compared to 2019 due primarily to increases in employee-related expenses, amortization of acquired intangibles, data center and cloud computing services utilized in delivering our products, and costs related to contractors and consultants.

Our acquisitions of Honey and GoPay collectively contributed approximately 15 percentage points to the growth rate of technology and development expenses in 2020.

General and administrative

General and administrative includes costs incurred to provide support to our business, including legal, human resources, finance, risk, compliance, executive, and other support operations.

General and administrative expenses increased $170 million , or 11% , in 2019 compared to 2018 , due primarily to increases in employee-related expenses, and to a lesser extent in facilities costs, and depreciation and amortization associated with systems and tools used in our general and administrative functions.

These increases were partially offset by a decrease in professional service expenses, including those related to acquisition related transaction expenses incurred in 2018 .

Our acquisitions completed in 2018 contributed approximately four percentage points to the growth rate of general and administrative expenses in 2019 .

General and administrative expenses increased $359 million, or 21%, in 2020 compared to 2019 due primarily to increases in employee-related expenses, professional services expenses, including those attributable to acquisition related transaction expenses, and amortization of acquired intangibles and internally developed software used in our general and administrative functions.

Our acquisitions of Honey and GoPay collectively contributed approximately 13 percentage points to the growth rate of general and administrative expenses in 2020.

Restructuring and other charges

Restructuring and other charges primarily consist of restructuring expenses and cost adjustments related to our loans and receivables, held for sale portfolio.

Restructuring and other charges decreased by $238 million in 2019 compared to 2018 , due primarily to the sale of our U.S.

consumer credit receivables portfolio in July 2018, prior to which adjustments to the cost basis of loans and interest receivables held for sale were recorded within restructuring and other charges.

This decline was partially offset by an increase in restructuring charges of $53 million in 2019 as compared to 2018.

Additionally, in 2019 , we recorded a gain of $7 million representing an adjustment to the loss from additional expenses incurred associated with the sale of our U.S.

consumer credit portfolio to Synchrony.

In the first quarter of 2019 and 2018, management approved strategic reductions of the existing global workforce, which resulted in restructuring charges of $78 million and $25 million , respectively.

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

The estimated annual employee-related costs associated with the impacted workforce is approximately $175 million.

The majority of the reduction in annual costs associated with the impacted workforce was reinvested in the business.

The strategic reduction approved in the first quarter of 2018 included restructuring charges related to the decision to wind down TIO’s operations.

We incurred primarily employee and severance benefits expenses under both the 2019 and 2018 strategic reductions, which were substantially completed by the end of 2019 and 2018, respectively.

Restructuring and other charges primarily consist of restructuring expenses and, in 2018, cost adjustments related to our loans and receivables, held for sale portfolio.

Restructuring and other charges increased by $68 million in 2020 compared to 2019.

During the first quarter of 2020, management approved a strategic reduction of the existing global workforce, which resulted in restructuring charges of $109 million.

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 spanned multiple quarters.

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

We have 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 2020, we incurred asset impairment charges of $30 million due to the write-off of certain right-of-use lease assets and related leasehold improvements in conjunction with exiting certain leased properties.

In 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 and severance 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 consolidated financial statements included in this Form 10-K.

Other income (expense), net

Other income (expense), net increased $97 million , or 53% , in 2019 compared to 2018 , primarily driven by net unrealized gains on strategic investments due to favorable changes in fair value related to our marketable equity securities and the positive impact of observable price changes related to our non-marketable equity securities, which collectively contributed to incremental net gains of $121 million year over year.

This increase was partially offset by incremental interest expense associated with the long term debt issued in the third quarter of 2019.

Other income (expense), net increased $1.5 billion, or 537%, in 2020 compared to 2019 primarily driven by net gains on strategic investments of $1.7 billion due primarily to favorable changes in fair value related to our marketable equity securities.

This increase was partially offset by a decline in interest income driven by lower interest rates as well as incremental 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 tax rate was 17% in 2020 and 18% in 2019.

The increase in our effective tax rate in 2019 was primarily the result of taxes associated with the intra-group transfer of intellectual property related to the acquisition of iZettle.

See “Note 16—Income Taxes” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information on our effective tax rate.

The decrease in our effective tax rate in 2020 was primarily the result of favorable discrete tax adjustments, partially offset by taxes associated with gains on strategic investments.

See “Note 16—Income Taxes” to the consolidated financial statements included in this Form 10-K for more information on our effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES

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Cash, cash equivalents, and investments (1)(2)

$ 15,852 $ 11,722

(1) Excludes assets related to funds receivable and customer accounts of $33.4 billion and $22.5 billion as of December 31, 2020 and 2019, respectively.

(2) Excludes total restricted cash of $64 million and $77 million at December 31, 2019 and 2018, respectively, and strategic investments of $1.8 billion and $293 million as of December 31, 2019 and 2018 , respectively.

(2) Excludes total restricted cash of $88 million and $64 million at December 31, 2020 and 2019, respectively, and strategic investments of $3.2 billion and $1.8 billion as of December 31, 2020 and 2019, respectively.

Foreign Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments held by our foreign subsidiaries were $7.2 billion as of December 31, 2019 and $8.7 billion as of December 31, 2018 , or 61% and 89% of our total cash, cash equivalents, and investments as of those respective dates.

Cash, cash equivalents, and investments held by our foreign subsidiaries were $7.0 billion at December 31, 2020 and $7.2 billion at December 31, 2019, or 44% and 61% of our total cash, cash equivalents, and investments as of those respective dates.

At December 31, 2020, all of our cash, cash equivalents, and investments held by foreign subsidiaries were subject to U.S.

taxation under Subpart F, Global Intangible Low Taxed Income (“GILTI”), or the one-time Transition Tax as further discussed in “Note 16—Income Taxes” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

taxation under Subpart F, Global Intangible Low Taxed Income (“GILTI”), or the one-time transition tax.

Subsequent repatriations to the U.S.

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Available Credit and Debt

On September 26, 2019, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $5.0 billion (collectively referred to as the “Notes”).

In May 2020 and September 2019, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $9.0 billion (collectively referred to as the “Notes”).

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.

On September 11, 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.

Additionally, on September 11, 2019, we entered into a 364-day credit agreement (“364-Day Credit Agreement”) that provides for an unsecured $1.0 billion 364-day revolving credit facility.

As of December 31, 2019 , no borrowings were outstanding under the Credit Agreement and the 364-Day Credit Agreement, and as such, $6.0 billion of borrowing capacity was available for the purposes permitted by the Credit Agreement and the 364-Day Credit Agreement, subject to customary conditions to borrowing.

Upon our entry into the Credit Agreement, the credit agreement that we entered into in the third quarter of 2015 providing for an unsecured $2.0 billion , five-year revolving credit facility was terminated.

In the fourth quarter of 2018, we entered into an amended credit agreement (“Amended Credit Agreement”), which amended and restated in its entirety the previous agreement entered into in 2017.

The Amended Credit Agreement provided for an unsecured $5.0 billion , 364-day delayed-draw term loan credit facility, which was available in up to four separate borrowings until April 6, 2019.

As of December 31, 2018 , $2.0 billion was outstanding under the Amended Credit Agreement.

On April 5, 2019, the Company drew down an additional $500 million under the Amended Credit Agreement.

On September 26, 2019, the Amended Credit Agreement was terminated and we repaid $2.5 billion of borrowings outstanding under that agreement.

We also maintain committed and uncommitted credit facilities in various regions throughout the world, with borrowing capacity of approximately $230 million in the aggregate.

This available credit, a portion of which is guaranteed by PayPal, includes facilities where we can withdraw and utilize the funds at our discretion for general corporate purposes, capital expenditures, and acquisitions.

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

As of December 31, 2019 , substantially all of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing.

For additional information, see “Note 12—Debt” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We have cash pooling arrangements with a financial institution for cash management purposes.

Each arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the financial institution (“Aggregate Cash Deposits”).

Each arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit.

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 December 31, 2019 , we had a total of $3.5 billion in cash withdrawals offsetting our $3.5 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangements.

Liquidity for Credit Portfolio Growth

Growth in the portfolio of loan receivables increases our liquidity needs, and any failure to meet those liquidity needs could adversely affect our business.

We continue to evaluate partnerships and third party sources of funding for our credit portfolio.

As of December 31, 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.

In March 2020, we drew down $3.0 billion under the Credit Agreement.

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

As of December 31, 2020, no borrowings were outstanding under the Credit Agreement and as such, $5.0 billion of borrowing capacity was available for the purposes permitted by the Credit Agreement, subject to customary conditions to borrowing.

Additionally, in September 2019, we entered into a 364-day credit agreement that provided for an unsecured $1.0 billion 364-day revolving credit facility, which terminated in September 2020.

We maintain an uncommitted credit facility with a borrowing capacity of approximately $30 million, where we can withdraw and utilize the funds at our discretion for general corporate purposes.

As of December 31, 2020, the majority of the borrowing capacity under this credit facility was available, subject to customary conditions to borrowing.

For additional information, see “Note 12—Debt” to our consolidated financial statements included in this Form 10-K.

We have a cash pooling arrangement with a financial institution for cash management purposes.

The arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the financial institution (“Aggregate Cash Deposits”).

The arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit.

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 the arrangement.

As of December 31, 2020, we had a total of $3.9 billion in cash withdrawals offsetting our $3.9 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.

Liquidity for Loans Receivable

Growth in our portfolio of loan receivables increases our liquidity needs, and any inability to meet those liquidity needs could adversely affect our business.

We continue to evaluate partnerships and third party sources of funding for our loans receivable portfolio.

In June 2018, the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”) agreed that PayPal’s management may designate up to 35% of European customer balances held in our Luxembourg banking subsidiary to be used for European and U.S.

credit activities.

During the year ended December 31, 2019 , an additional amount of $500 million was designated by management to fund such credit activities.

As of December 31, 2019 , the cumulative amount approved by management to be designated for credit activities aggregated to $2.0 billion and represented approximately 31% 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 December 31, 2020, the cumulative amount approved by management to be designated for credit activities aggregated to $2.0 billion and represented approximately 21% 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 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 pandemic and includes initial loan repayment deferrals and debt forgiveness provisions for eligible borrowers.

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.

Credit Ratings

As of December 31, 2019 , we continue to be rated investment grade by Standard and Poor’s Financial Services, LLC and Fitch Ratings, Inc.

As of December 31, 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.

Our goal is to be rated investment grade, but as circumstances change, there are factors that could result in our credit ratings being downgraded or put on a watch list for possible downgrading.

If that were to occur, it could increase our borrowing rates, including the interest rate on loans under our credit agreements.

If that were to occur, it could increase our borrowing rates, including the interest rate on borrowings under our credit agreement.

The risk of losses from our buyer and seller protection programs are specific to individual customers, merchants, and transactions, and may also be impacted by regional variations in, and changes or modifications to, the programs, including as a result of changes in regulatory requirements.

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Historical loss rates may not be indicative of future results.

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

Its 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.

Stock Repurchases and Acquisitions

During the year ended December 31, 2019 , we repurchased approximately $1.4 billion of our common stock, including approximately $656 million in the open market and approximately $750 million pursuant to the accelerated share repurchase agreement under our stock repurchase program authorized in April 2017.

As of December 31, 2019 , a total of approximately $68 million and $10 billion remained available for future repurchases of our common stock under our April 2017 and July 2018 stock repurchase programs, respectively.

For additional information, see “Note 14—Stock Repurchase Programs” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

In January 2020, we completed our acquisition of Honey Science Corporation (“Honey”) for approximately $3.6 billion in cash and approximately $400 million in restricted stock, subject to vesting conditions.

During the year ended December 31, 2020, we repurchased approximately $1.6 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 December 31, 2020, a total of approximately $8.4 billion remained available for future repurchases of our common stock under our July 2018 stock repurchase program.

For additional information, see “Note 14—Stock Repurchase Programs” to our consolidated financial statements included in this Form 10-K.

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.

We believe our acquisition of Honey will enhance our value proposition by allowing us to further simplify and personalize shopping experiences for consumers while driving conversion and increasing consumer engagement and sales for merchants.

For additional information, see “Note 4—Business Combinations” in the notes to the consolidated financial statements included in this Form 10-K.

Other Considerations

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.

In the second quarter of 2020, we announced our commitment to invest $530 million to support racial equality.

The investments will include:

charitable contributions, grants to small businesses, internal investments to support and strengthen diversity and inclusion initiatives, and an economic opportunity fund, which will include bolstering our relationships with community banks and credit unions serving underrepresented minority communities, as well as investing directly into black- and minority-led startups and minority-focused investment funds.

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

See “Item 1A.

Risk Factors— Risk Factors That May Affect Our Business, Results of Operations, and Financial Condition ” and “Note 13—Commitments and Contingencies” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional discussion of these and other risks facing our business.

Risk Factors” and “Note 13—Commitments and Contingencies” to our consolidated financial statements included in this Form 10-K for additional discussion of these and other risks that our business faces.

We believe that our existing cash, cash equivalents, and investments, cash expected to be generated from operations, and our expected access to capital markets, together with potential external funding through third party sources, will be sufficient to fund our operating activities, anticipated capital expenditures, and our credit products for the foreseeable future.

Depending on market conditions, we may from time to time issue debt, including in private or public offerings, to fund our operating activities, finance acquisitions, make strategic investments, repurchase shares under our share repurchase programs, or reduce our cost of capital.

Depending on market conditions, we may from time to time issue debt, including in private or public offerings, to fund our operating activities, finance acquisitions, make strategic investments, repurchase shares under our stock repurchase program, or reduce our cost of capital.

The following table summarizes our consolidated statements of cash flows:

Year Ended December 31,

2020 2019 2018

(In millions)

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Operating activities (1)

$ 5,854 $ 4,071 $ 5,480

Investing activities (1)

(16,218) (5,742) 821

Financing activities (1)

12,492 4,187 (1,240)

Effect of exchange rates on cash, cash equivalents, and restricted cash 169 (6) (113)

Net increase in cash, cash equivalents, and restricted cash $ 2,297 $ 2,510 $ 4,948

(1) Prior period amounts have been revised to conform to the current period presentation.

Refer to “Note 1—Overview and Summary of Significant Accounting Policies” to our consolidated financial statements included in this Form 10-K for additional information.

Operating Activities

Cash flows from operating activities includes net income adjusted for certain non-cash expenses, timing differences between expenses recognized for provision for transaction and loan losses and actual cash transaction losses incurred, and changes in other assets and liabilities.

Cash flows from operating activities includes net income adjusted for certain non-cash expenses, timing differences between expenses recognized for provision for transaction and credit losses and actual cash transaction losses incurred, and changes in other assets and liabilities.

Significant non-cash expenses for the period include depreciation and amortization and stock-based compensation.

The cash impact from actual transaction losses incurred during a period is reflected as a negative impact to changes in other assets and liabilities in cash from operating activities.

The expenses recognized during the period for provision for loan losses are estimates of probable incurred losses on our consumer and merchant credit products (excluding the U.S.

consumer credit portfolio from and after November 2017).

Actual charge-offs of receivables related to our consumer and merchant credit products (excluding the U.S.

consumer credit portfolio from and after November 2017) have no impact on cash from operating activities.

The expenses recognized during the period for provision for credit losses are estimates of current expected credit losses on our merchant and consumer credit products.

Actual charge-offs of receivables related to our merchants and consumer credit products have no impact on cash from operating activities.

We generated cash from operating activities of $5.9 billion in 2020 due primarily to operating income of $3.3 billion, as well as adjustments for non-cash expenses including:

provision for transaction and credit losses of $1.7 billion, stock-based compensation of $1.4 billion, and depreciation and amortization of $1.2 billion.

Net income was also adjusted for net gains on our strategic investments of $1.9 billion in 2020, and changes in other assets and liabilities primarily related to actual cash transaction losses incurred during the period of $1.1 billion and an increase in other assets of $498 million, partially offset by an increase in other liabilities of $1.0 billion.

We generated cash from operating activities of $4.1 billion in 2019 due primarily to operating income of $2.7 billion.

During 2019, adjustments for non-cash expenses of stock-based compensation were $1.0 billion , depreciation and amortization were $912 million , and provision for transaction and loan losses were $1.4 billion , partially offset by adjustments related to deferred income taxes of $269 million and net unrealized gains on our strategic investments of $207 million in 2019.

The cash generated from operating activities was negatively impacted by the changes in other assets and liabilities of $433 million , primarily related to actual cash transaction losses incurred during the period partially offset by an increase in funds payable and amounts due to customers, and an increase in accounts receivable of $120 million .

We generated cash from operating activities of $5.5 billion in 2018 due primarily to operating income of approximately $2.2 billion and the positive impact of $1.4 billion of changes in loans and interest receivable, held for sale, net following the sale of our U.S.

During 2019, adjustments for non-cash expenses included provision for transaction and credit losses of $1.4 billion, stock-based compensation of $1.0 billion, and depreciation and amortization of $912 million, partially offset by adjustments related to deferred income taxes of $269 million and net unrealized gains on our strategic investments of $208 million.

The cash generated from operating activities was negatively impacted by changes in other assets and liabilities primarily related to actual cash transaction losses incurred during the period of $1.1 billion, an increase in other assets of $566 million and accounts receivable of $120 million, partially offset by an increase in other liabilities of $722 million.

We generated cash from operating activities of $5.5 billion in 2018 due primarily to operating income of $2.2 billion and the positive impact of $1.4 billion of changes in loans and interest receivable, held for sale, net following the sale of our U.S.

consumer credit receivables portfolio.

Adjustments for non-cash expenses of stock-based compensation were $853 million and depreciation and amortization were $776 million during 2018 .

Adjustments for non-cash expenses related to the provision for transaction and loan losses were approximately $1.3 billion and cost basis adjustments to loans and interest receivable held for sale were $244 million during 2018 .

The cash generated from operating activities was negatively impacted by changes in other assets and liabilities of $708 million , primarily related to actual cash transaction losses incurred during the period.

During 2018, adjustments for non-cash expenses included provision for transaction and credit losses of $1.3 billion, stock-based compensation of $853 million, depreciation and amortization of $776 million, and cost basis adjustments to loans and interest receivable held for sale of $244 million.

The cash generated from operating activities was also impacted by changes in other assets and liabilities, primarily related to actual cash transaction losses incurred during the period of $1.0 billion, partially offset by an increase in other liabilities of $428 million.

Cash paid for income taxes, net in 2020, 2019, and 2018 was $565 million, $665 million, and $328 million, respectively.

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Cash flows from investing activities includes purchases, maturities and sales of investments, cash paid for acquisitions and strategic investments, purchases and sales of property and equipment, changes in principal loans receivable, and funds receivable.

The net cash used in investing activities of $16.2 billion in 2020 was due primarily to purchases of investments of $41.5 billion, acquisitions (net of cash acquired) of $3.6 billion, changes in funds receivable from customers of $1.6 billion, and purchases of property and equipment of $866 million.

These cash outflows were partially offset by maturities and sales of investments of $30.9 billion, changes in principal loans receivable, net of $294 million, and proceeds from the sale of property and equipment of $120 million.

The net cash used in investing activities of $5.7 billion in 2019 was due primarily to purchases of investments of $27.9 billion, changes in principal loans receivable, net of $1.6 billion, purchases of property and equipment of $704 million, and changes in funds receivable from customers of $351 million.

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Cash flows from financing activities includes proceeds from issuance of common stock, purchases of treasury stock, tax withholdings related to net share settlements of equity awards, borrowings and repayments under financing arrangements, and funds payable and amounts due to customers.

We generated cash from financing activities of $3.7 billion in 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 our Amended Credit Agreement, and changes in funds payable and amounts due to customers of $2.5 billion .

These cash inflows were partially offset by repayment of borrowings under our Amended Credit Agreement of $2.5 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 $504 million .

We generated cash from financing activities of $12.5 billion in 2020 due primarily to changes in funds payable and amounts due to customers of $10.6 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 $1.6 billion of our common stock under our stock repurchase program, and tax withholdings related to net share settlement of equity awards of $521 million.

We generated cash from financing activities of $4.2 billion in 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 previous credit agreement, and changes in funds payable and amounts due to customers of $3.0 billion.

These cash inflows were partially offset by repayment of borrowings under a previous credit agreement of $2.5 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 $504 million.

The net cash used in financing activities of $1.2 billion in 2018 was due primarily to the repurchase of $3.5 billion of our common stock under our stock repurchase programs, repayments of borrowing under financing arrangements of $1.1 billion, and tax withholdings related to net share settlement of equity awards of $419 million, partially offset by cash inflows from borrowings under financing arrangements of $2.1 billion and changes in funds payable and amounts due to customers of $1.6 billion.

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

Foreign currency exchange rates had a negative effect on cash, cash equivalents, and restricted cash during 2019 and 2018 of $6 million and $113 million , respectively.

Foreign currency exchange rates had a positive impact of $169 million, a negative impact of $6 million, and a negative impact of $113 million on cash, cash equivalents, and restricted cash during 2020, 2019, and 2018, respectively.

The positive impact in 2020 was due to the weakening of the U.S.

dollar against certain foreign currencies, primarily the Australian dollar.

The negative impact in 2018 was due to the strengthening of the U.S.

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As of December 31, 2020, approximately $3.0 billion of unused credit was available to PayPal Credit account holders compared to $3.1 billion of unused credit as of December 31, 2019.

Substantially all of the PayPal Credit account holders with unused credit are in the U.K.

While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all our PayPal Credit account holders will access their entire available credit at any given point in time.

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We believe we will be able to fund these obligations through our existing cash and investment portfolio and cash expected to be generated from operations.

Transition Tax

Long-term Debt

Payments Due During the Year Ending December 31,

(In millions)

Obligations Operating

Leases Transition Tax Long-term Debt Total

Payments Due During the Year Ending December 31, (In millions)

2021 $ 409 $ 171 $ 114 $ 213 $ 907

2022 239 140 114 1,213 1,706

2023 129 126 212 1,185 1,652

2024 134 116 284 1,428 1,962

2025 60 100 354 1,140 1,654

Thereafter 52 277 — 5,854 6,183

$ 1,023 $ 930 $ 1,078 $ 11,033 $ 14,064

The significant assumptions used in our determination of amounts presented in the above table are as follows:

Purchase obligation amounts include minimum purchase commitments for advertising, capital expenditures (computer equipment, software applications, engineering development services, and construction contracts), and other goods and services entered into in the ordinary course of business.

• Purchase obligation amounts include minimum purchase commitments for advertising, capital expenditures (computer equipment, software applications, engineering development services, and construction contracts), data center and cloud computing services, and other goods and services entered into in the ordinary course of business.

• Operating lease amounts include minimum rental payments under our non-cancelable operating leases (including leases not yet commenced) primarily for office and data center facilities.

The amounts presented are consistent with contractual terms and are not expected to differ significantly from actual results under our existing leases, unless a substantial change in our headcount needs requires us to expand our occupied space or exit an office facility early.

Transition Tax represents the one-time mandatory tax on previously deferred foreign earnings under the Tax Cuts and Jobs Act (the “Tax Act”), as further discussed in “Note 16—Income Taxes” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

• Transition tax represents the one-time mandatory tax on previously deferred foreign earnings under the Tax Cuts and Jobs Act.

• Long-term debt amounts represent the future principal and interest payments (based on contractual interest rates) on our fixed-rate debt.

For more information, see “Note 12—Debt” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

As we are unable to reasonably predict the timing of settlement of liabilities related to unrecognized tax benefits, net, the table above does not include $990 million of such non-current liabilities included in deferred and other tax liabilities recorded on our consolidated balance sheets as of December 31, 2019 .

For more information, see “Note 12—Debt” to our consolidated financial statements included in this Form 10-K.

As we are unable to reasonably predict the timing of settlement of liabilities related to unrecognized tax benefits, net, the table above does not include $1.4 billion of such non-current liabilities included in deferred and other tax liabilities recorded on our consolidated balance sheet as of December 31, 2020.

The Company does not experience meaningful seasonality with respect to net revenues.

No individual quarter in 2020, 2019, or 2018 accounted for more than 30% of annual net revenue.

Critical Accounting Policies and Estimates

CRITICAL ACCOUNTING POLICES AND ESTIMATES

The application of U.S.

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Senior management has discussed the development, selection, and disclosure of these estimates with the Audit, Risk, and Compliance Committee of our Board of Directors.

Our significant accounting policies, including recent accounting pronouncements, are described in “Note 1 — Overview and Summary of Significant Accounting Policies” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated, and provides material information to investors.

A quantitative sensitivity analysis is provided where information is available to reasonably estimate the impact, and provides material information to investors.

The amounts used to assess sensitivity are included to allow users of this report to understand a general directional cause and effect of changes in the estimates and do not represent management’s predictions of variability.

For all of these estimates, it should be noted that future events rarely develop exactly as forecasted, and estimates require regular review and adjustment.

Transaction and loan losses

Transaction and loan losses include the expense associated with our customer protection programs, fraud, chargebacks, and credit losses associated with our loans receivable balances.

Our transaction and loan losses fluctuate depending on many factors, including:

total TPV, macroeconomic conditions, changes to 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 product and merchant loans and advances arising from our PayPal Working Capital (“PPWC”) and PayPal Business Loan (“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, ACH returns, buyer protection program claims, account takeovers, and account overdrafts.

Additions to the allowance, in the form of provisions, are reflected in transaction and loan losses on our 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, and the mix of transaction and loss types.

We also establish an allowance for loans receivable, which represents our estimate of probable incurred loan losses inherent in our merchant loans and advances and consumer loans receivable.

Increases to the allowance for loans receivable are reflected as transaction and loan losses on our consolidated financial statements.

TRANSACTION AND CREDIT LOSSES

Transaction and credit losses include the expense associated with our customer protection programs, fraud, chargebacks, and credit losses associated with our loans receivable balances.

Our transaction and credit losses fluctuate depending on many factors, including:

total TPV, current and projected macroeconomic conditions, including unemployment rates, 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 product and merchant loans and advances arising from our PayPal Working Capital (“PPWC”) and PayPal Business Loan (“PPBL”) products.

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 or unsatisfactory delivery of purchased items, buyer protection program claims, account takeovers, and Automated Clearing House returns.

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

The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving collection and write-off patterns, and 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 current expected credit losses inherent in our portfolio of loans and interest receivable.

This evaluation process is subject to numerous estimates and judgments.

For our consumer loan receivables, consisting primarily of our international consumer receivables, the allowance is primarily based on forecasted principal balance delinquency rates (“roll rates”).

Roll rates are the percentage of balances which we estimate will migrate from one stage of delinquency to the next based on our historical experience, as well as external factors such as estimated bankruptcies and levels of unemployment.

Roll rates are applied to the principal amount of our consumer loan receivables for each stage of delinquency, from current to 180 days past the payment due date, to estimate the principal loans which have incurred losses and are probable to be charged off.

For merchant loans and advances the allowance is primarily based on principal balances, forecasted delinquency rates, and recoveries through the use of a vintage-based loss forecasting model.

The allowance for loss against the interest receivable is determined primarily by applying historical average customer account roll rates to the interest receivable balance in each stage of delinquency to project the value of accounts that have incurred losses and are probable to be charged off.

The allowance for fees receivable is primarily based on fee balances, forecasted delinquency rates, and recoveries through the use of a vintage-based loss forecasting model.

Increases to the allowance for interest receivable are reflected as a reduction of net revenues on our consolidated statements of income.

Increases to the allowance for fees receivable are recognized as a reduction in deferred revenues included in other current liabilities on our consolidated balance sheets.

Determining appropriate allowances for these losses is an inherently uncertain process and ultimate losses may vary from the current estimates.

The allowance is primarily based on expectations of credit losses based on historical lifetime loss data as well as macroeconomic forecasts applied to the portfolio, which is segmented by factors such as geographic region, delinquency, and vintage.

Loss curves are generated using historical loss data for each loan portfolio and are applied to segments of each portfolio, categorized by factors such as geographic region, first borrowing versus reuse, delinquency, credit rating and vintage, which vary by portfolio.

We then apply macroeconomic factors such as forecasted trends in unemployment and benchmark credit card charge-off rates, which are sourced externally, using a single scenario that we believe is most appropriate to the economic conditions applicable to a particular period.

We utilize externally sourced macroeconomic scenario data to supplement our historical information due to the limited period in which our credit product offerings have been in existence.

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

We also include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit 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 we have considered for projected loss rates is approximately 2.5 to 3.5 years, depending upon the product.

The allowance for credit losses on interest and fees receivable is determined primarily by applying loss curves to each portfolio by geography, delinquency, and period of origination, among other factors.

Determining appropriate current expected credit loss allowances for loans and interest receivable is an inherently uncertain process and ultimate losses may vary from the current estimates.

We regularly update our allowance estimates as new facts become known and events occur that may impact the settlement or recovery of losses.

The allowances are maintained at a level we deem appropriate to adequately provide for losses incurred at the balance sheet date.

Based on our results for the year ended December 31, 2019 , an aggregate ten percent increase in our transaction and loan loss rate would negatively impact transaction and loan losses by approximately $138 million .

The allowances are maintained at a level we deem appropriate to adequately provide for current expected credit losses at the balance sheet date after incorporating the impact of externally sourced macroeconomic forecasts.

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

As of December 31, 2020, we utilized externally published projections of the U.S.

forecasted unemployment rates and credit card charge-off rates over the reasonable and supportable period, indicating a slight increase in the first half of 2021 followed by a gradual decline and ultimate stabilization of these rates, resulting in an overall principal and interest coverage ratio of approximately 23%.

The projected gradual decline in unemployment and credit card charge-off rates is reflective of a prolonged recovery period where we expect to 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 December 31, 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 also 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 December 31, 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 $36 million based on the loans and interest receivable balance outstanding as of December 31, 2020.

ACCOUNTING FOR INCOME TAXES

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In addition to local country tax laws and regulations, our income tax rate depends on the extent that our foreign earnings are taxed by the U.S.

through new provisions under the Tax Act such as the GILTI tax and base erosion anti-abuse tax or as a result of our indefinite reinvestment assertion.

through provisions such as the GILTI tax and base erosion anti-abuse tax or as a result of our indefinite reinvestment assertion.

Indefinite reinvestment is determined by management’s judgment about, and intentions concerning, our future operations.

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Significant judgment is required in both the determination of probability and whether an exposure is reasonably estimable.

Our judgments are subjective based on the status of the legal or regulatory proceedings, the merits of our defenses, and consultation with in-house and outside legal counsel.

Our judgments are subjective and are based on the status of the legal or regulatory proceedings, the merits of our defenses, and consultation with in-house and outside legal counsel.

Because of uncertainties related to these matters, accruals are based only on the best information available at the time.

As additional information becomes available, we reassess the potential liability related to pending claims, litigation, or other violations and may revise our estimates.

Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which we operate, our judgments may be materially different than the actual outcomes.

Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which we operate, our judgments may differ materially from the actual outcomes.

REVENUE RECOGNITION

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The valuation of assets acquired in a business combination and asset impairment reviews require the use of significant estimates and assumptions.

The acquisition method of accounting for business combinations requires us to estimate the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in an acquired business to properly allocate purchase price consideration between assets that are depreciated and amortized and goodwill.

Impairment testing for assets, other than goodwill and indefinite-lived intangible assets, requires the allocation of cash flows to those assets or group of assets and, if required, an estimate of fair value for the assets or group of assets.

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We evaluate goodwill and intangible assets for impairment on an annual basis, or sooner if indicators of impairment exist.

GAAP, the evaluation of indefinite-lived intangible assets for impairment allows for a qualitative assessment to be performed, which is similar to the U.S.

GAAP, the evaluation of indefinite-lived intangible assets for impairment allows for a qualitative assessment to be performed, which is similar to U.S.

GAAP for evaluating goodwill for impairment.

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Under the quantitative impairment test, if the carrying amount of the reporting unit goodwill or indefinite-lived intangible asset exceeds the fair value of the respective reporting unit goodwill or indefinite-lived intangible asset, an impairment loss is recorded in the statement of income.

Measurement of the fair value of a reporting unit is based on one or more of the following fair value measures:

Measurement of the fair value of a reporting unit could be based on one or more of the following fair value measures:

amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties, present value techniques of estimated future cash flows, valuation techniques based on multiples of earnings or revenue, or a similar performance measure.

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-K

Item 7. Management’s Discussion and Analysis