UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 2019.2020.
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the Transition Periodtransition period from to .
Commission file number 001-36859
PayPal Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 47-2989869 | ||||||||||
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 2211 North First Street | San Jose, | California | 95131 | ||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common stock, $0.0001 par value per share | PYPL | NASDAQ Global Select Market | ||||||
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | ||||||||
| Non-accelerated Filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 28, 2019,30, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $134.5$204.2 billion based on the closing sale price as reported on the NASDAQ Global Select Market.
As of January 31, 2020,29, 2021, there were 1,172,955,4851,171,175,760 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 20202021 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2019.2020.
TABLE OF CONTENTS
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| Part I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Part III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| Part IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
Trademarks, Trade Names and Service Marks
PayPal owns or has rights to use the trademarks, service marks, and trade names that it uses in conjunction with the operation of its business. Some of the more important trademarks that PayPal owns or has rights to use that appear in this Annual Report on Form 10-K include: PayPal®, PayPal Credit®, Braintree, Venmo, Xoom, iZettle, Hyperwallet, and iZettle,Honey, which may be registered or trademarked in the United States and other jurisdictions. PayPal’s rights to some of these trademarks may be limited to select markets. Each trademark, trade name, or service mark of any other company appearing in this Annual Report on Form 10-K is, to PayPal’s knowledge, owned by such other company.
PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“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. YouAdditionally, our forward-looking statements include expectations related to anticipated impacts of the outbreak of the novel coronavirus (“COVID-19”). These forward-looking statements can identify these forward-looking statementsbe 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. These forward-looking statements involve risks and uncertainties that could cause our actual results and financial condition to differ materially from those expressed or implied in our forward-looking statements. 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”). 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 information in this report in conjunction with the audited consolidated financial statements and the related notes that appear elsewhere in this report.
ITEM 1. BUSINESS
PayPal Holdings, Inc. was incorporated in Delaware in January 2015 and is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumersmerchants and merchantsconsumers worldwide. PayPal is committed to democratizing financial services to improve the financial health of individuals and empowering peopleto increase economic opportunity for entrepreneurs and businesses to join and thrive inof all sizes around the global economy.world. Our goal is to enable our consumersmerchants and merchantsconsumers to manage and move their money anywhere in the world, anytime, on any platform, and using any device.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 iZettleHyperwallet products and services, comprise our proprietary Payments Platform. Unless otherwise expressly stated or the context otherwise requires, references to “we,” “our,” “us,” “the Company,” or “PayPal” refer to PayPal Holdings, Inc. and its consolidated subsidiaries.
PayPal’s payment solutions enable our customers to send and receive payments. We operate a global, two-sided network at scale that connects merchants and consumers with 305377 million active accounts (consisting of 281348 million consumer active accounts and 2429 million merchant active accounts) across more than 200 markets. PayPal helps merchants and consumers connect, transact, and complete payments, whether they are online, on a mobile device, in an app, or in person. PayPal is more than a connection to third-party payment networks. We provide proprietary payment solutions accepted by merchants that enable the completion of payments on our Payments Platform on behalf of our customers. The COVID-19 pandemic has impacted consumer behavior and has accelerated the shift from traditional in-store shopping toward e-commerce and buy online and pick up in store to the extent that merchants are adopting safer contactless payment solutions based on consumer demand for such options.
We offer our customers the flexibility to use their accounts to purchase and receive paymentpayments for goods and services, as well as the ability to transfer and withdraw funds. We enable consumers to exchange funds more safely with merchants using a variety of funding sources, which may include a bank account, a PayPal Cash or Cash Plus account balance, a Venmo account balance, a PayPal Credit account,our credit products, a credit orcard, debit card, or other stored value products such as coupons, gift cards, and eligible credit card rewards. Our PayPal, Venmo, and Xoom products also make it safer and simpler for friends and family to transfer funds to each other. We offer merchants an end-to-end payments solution that provides authorization and settlement capabilities, as well as instant access to funds. We help merchants connect with their customers and manage risk. We enable consumers to engage in cross-border shopping and merchants to extend their global reach while reducing the complexity and friction involved in enabling overseas and cross-border trade.
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We earn revenues primarily by charging fees for completing payment transactions for our customers and other payment-related services that are typically based on the volume of activity processed on our Payments Platform. Generally weWe generally do not charge consumers to fund or draw from their accounts; however, we generate revenue from consumers on fees charged for foreign currency exchange,conversion and instant transfers from their PayPal or Venmo account to their debit card or bank account, as well as from interest and fees from our PayPal Credit product.credit products. We also earn revenue by providing other value added services, which comprise revenue earned through partnerships, our PayPal merchant and consumer credit products, referral fees, subscription fees, gateway services, and other services that we provide to our merchants and consumers. Our gateway services, which include our Payflow Gateway service and Braintree Gateway service, provide the technology that links a merchant’s website to its processing network and merchant account and enables merchants to accept payments online with credit or debit cards.
KEY PERFORMANCE METRICS
We measure the relevance of our products and services to our customers and therefore the performance and success of our business through active accounts, payment transactions, and total payment volume:
An Active AccountsAccount: 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-partythird party whose customers are provided access to PayPal’s Payments Platform through such third-party’s login credentials.
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.
Total Payment Volume (“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.
OUR STRENGTHS
Our business is built on a strong foundation designed to drive growth and differentiate us from our competitors. We believe that our competitive strengths include the following:
•Two-sided network—our Payments Platform connecting merchants and consumers enables PayPal to offer unique end-to-end product experiences while gaining valuable insights into customer behavior. Our Payments Platform provides for digital, mobile, and in-store (at the point of sale) transactions while being both technology and platform agnostic.
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•Scale—our global scale allows us to drive organic growth. As of December 31, 2020, we had 377 million active accounts, consisting of 348 million consumer active accounts and 29 million merchant active accounts in more than 200 markets around the world. A market is a geographic area or political jurisdiction, such as a country, territory, or protectorate, in which we offer some or all of our products and services. A country, territory, or protectorate is identified by a distinct set of laws and regulations. In 2020, we processed $936 billion of TPV.
•Risk and Compliance Management—our enterprise risk and compliance management program and use of Payment Transactions:Number of paymenttokenization are designed to help keep customer information secure, and to help ensure we process legitimate transactions isaround the total number of payments, net of payment reversals, successfully completed on our Payments Platformworld, while identifying and minimizing illegal, high-risk, or enabled by PayPal via a partner payment solution, not including gateway-exclusivefraudulent transactions.
Merchant Value Proposition
We partner with our merchants to help grow and expand their businesses by providing global reach and powering all aspects of digital checkout. We offer alternative payment methods, including access to credit solutions, provide fraud prevention and risk management solutions, reducingreduce losses through proprietary protection programs, and offer tools and insights for leveraging data analytics to attract new customers and improve sales conversion. We employ a technology and platform agnostic approach intended to enable merchants of all sizes to quickly and easily provide digital checkout online, on mobile devices, and in-store (at the point of sale) across all platforms and devices and to securely and simply receive payments from their customers. Merchants can onboard quickly
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PayPal’s Payments Platform enables merchants to accept all types of online and offline payments, including those made with the PayPal and are generally not required to invest in new or specialized hardware. PayPal is also a popular form of payment solution for mobile commerce,Venmo wallets, credit cards and our business has grown with the increased adoption of mobile devices. We believe our Braintree products strengthen our position in digital and mobile payments and extend our coverage to a new class of retailers and service providers that offer their services primarily through mobile applications. Through a single Braintree integration, a merchant can begin accepting payments with credit or debit cards, PayPal, PayPal Credit, Google Pay, Apple Pay, Samsung Pay, and other payment solutions. iZettle offers a card acceptance service that enables small businesses to accept credit and debit card payments,Google Pay, as well as other popular local payment methods. Our diversified product suite is tailored to meet the needs of merchants regardless of their size or business complexity. We have expanded our merchant value proposition to enable payment acceptance at the point of sale through our PayPal and Venmo digital wallets, our iZettle point of sale solutions, and our quick response (“QR”) code-based solutions. We aim to offer a softwareseamless, omni-channel solution to record,that helps merchants manage and analyze sales. iZettle provides in-store capabilities in twelve countries. During 2019, we launchedgrow their business. Our Honey Platform and PayPal for Marketplaces, our global, end-to-end solution designed to satisfy the uniqueconsumer credit offerings, including installment payment needs of platforms, marketplaces, and crowdfunding sites, which provides payment solutions for accepting and disbursing funds between consumers and businesses. We also offer gateway services which provide the payment gateway technology that links a merchant’s website to its processing network andproducts, enable merchants to accept payments online with credit or debit cards. Our acquisition of a controlling equity interest in Guofubao Information Technology Co. (GoPay), Ltd (“GoPay”), a holder of payment business licenses in China, enables us to partner with Chinese financial institutions and technology platforms to provide a more comprehensive set of payment solutions to merchants and consumers, both in China and globally.drive increased conversion through higher consumer engagement.
We offer access to credit products for certain small and medium-sized merchants through our PayPal Working Capital and PayPal Business Loan products, which we collectively refer to as our business financingmerchant lending offerings. Our PayPal Working Capital product allows businesses to borrow a certain percentage of their annual payment volume processed by PayPal for a fixed fee. Our PayPal Business Loan product provides businesses with short-term financing for a fixed fee based on an evaluation of both the applying business as well as the business owner. We believe that our business financingmerchant lending offerings allow us to deepen our engagement with our existing small and medium-sized merchants and expand services to new merchants by providing access to capital that may not be available effectively or efficiently from traditional banks or other lending providers.
Our acquisition of a controlling equity interest in Guofubao Information Technology Co. (GoPay), Ltd (“GoPay”), a holder of payment business licenses in China, enables us to partner with Chinese financial institutions and technology platforms to provide a more comprehensive set of payment solutions to merchants and consumers, both in China and globally.
We generate revenues from merchants primarily by charging fees for completing their payment transactions and other payment-related services.
Consumer Value Proposition
We focus on providing affordable consumer products intended to democratize the management and movement of money. We provide consumers with a digital wallet whichthat enables them to send payments to merchants more safely using a variety of funding sources, which may include a bank account, a PayPal Cash or Cash Plus account balance, a Venmo account balance, a PayPal Credit account,our consumer credit products, a credit orcard, debit card, or other stored value products such as coupons, gift cards, and eligible credit card rewards.
We also offer consumers person-to-person (“P2P”)P2P payment solutions through our PayPal, Venmo, and Xoom products. PayPal continues to be a key driver of our total P2P volumes, enablingproducts and services. We enable both domestic and international P2P transfers across our Payments Platform. Our Venmo app in the U.S. is a leading mobile application used to move money between our customers and to make purchases at approvedselect merchants. Xoom is an international money transfer service that enables our customers to send money and prepaid mobile phone reloads to, and pay bills for, people around the world in a secure, fast, and cost-effective way. P2P is a significant customer acquisition channel that facilitates organic growth by enabling potential PayPal users to establish active accounts with us at the time they make or receive a P2P payment. We also simplify and personalize shopping experiences for our consumers through our Honey Platform by offering tools for product discovery, price-tracking, and offers, which enhances consumer engagement and conversion and sales for our merchants.
We offer our PayPal Credit productproducts to consumers in certain markets as a potential funding source at checkout. Once a consumer is approved for credit, PayPal Credit is made available as a funding source for that account holder. Our U.S. PayPal brandedPayPal- and Venmo-branded consumer credit program is offered exclusivelyprimarily through Synchrony Bank. In addition, we have expanded our consumer credit offerings to include installment payment products in the U.S., U.K., France, and Germany. We believe that our consumer credit products allow us to increase engagement with consumers and merchants on our two-sided network and differentiate us from other payment processors by helping merchants drive incremental sales.network.
We generate revenue from consumers on fees charged for foreign currency exchange,conversion, optional instant transfers from their PayPal or Venmo account to their debit card or bank account, and on interest and fees from our PayPal Credit product.products, and other miscellaneous fees.
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PROTECTING MERCHANTS AND CONSUMERS
Protecting merchants and consumers on our Payments Platform from financial and fraud loss is imperative to successfully competing in the payments industry and sustainably growing our business. Fraudulent activities, such as account takeover, identity theft (including stolen financial information), and counterparty malicious activities, represent a significant risk to merchants and consumers, as well as their payment partners. We provide merchants and consumers with protection programs on mostfor certain purchase transactions completed on our Payments Platform, excluding gateway-exclusive transactions or situations where our customer agreements specifically do not provide for protections.Platform. We believe that these programs, which help protect both merchants and consumers from financial loss resulting from fraud and counterparty non-performance, are generally much broader than similar protections provided by other participants in the payments industry. As a result, merchants may incur losses for chargebacks and other claims on certain transactions when using other payments providers that the merchants would not incur if they used our payments services. We also provide consumer protection against losses on qualifying purchases and accept claims for review up to 180 days post-transaction. We believe that this protection is generally consistent with, or better than, that offered by other payments providers. These programs are designed to promote confidence on both the part of consumers, who will only be required to pay if they receive their purchased item or service in the condition significantly as described, and merchants, who will receive payment for the product or service they deliver to the customer.
Our ability to protect both merchants and consumers is based largely on our proprietary, end-to-end Payments Platform and our ability to leverageutilize the data from both sides of transactions on our two-sided network, specifically from buyers and sellers and from senders and receivers of payments. We believe mobile devices will continue to play a significant and increasing role in commerce, including by creating the opportunities to make ourthe payments ecosystem safer. For example, PayPal uses data from mobile devices and growing protection for the mobile operating environment to help reduce financial and fraud risk to merchants and consumers. Our ongoing investment in systems and processes designed to enhance the safety and security of our products reflects our goal of having PayPal recognized as one of the world’s most trusted payments brands.
COMPETITION
The global payments industry is highly competitive, rapidlycontinuously changing, highly innovative, and increasingly subject to regulatory scrutiny and oversight. We compete against a wide range of businesses, including those that arebusinesses. Some of our current and potential competitors may be larger than we are, have larger customer bases, greater namebrand recognition, longer operating histories, or a dominant or more secure position, broader geographic scope, volume, scale, resources, and market share than we do, or offer other products and services to consumers and merchants that we do not offer, as well asoffer. Other competitors are smaller or younger companies that may be more agile in responding quickly to regulatory and technological changes. Many of the areas in which we compete evolve rapidly with changinginnovative and disruptive technologies, emerging competitors, business alliances, shifting consumer habits and user needs, price sensitivity on the part of merchants and consumers, and frequent introductions of new products and services. Competition also may intensify as businesses enter into business combinations and partnerships, and established companies in other segments expand to become competitive with different aspects of our business.
We compete primarily on the basis of the following:
differentiate ourselves to merchants through our ability to attract, retain,innovate and engage bothdevelop products and services that offer new payment experiences for our merchants, and consumers on our Payments Platform;
simplicity and transparency of our fee structure;
structure, and our seller protection programs. In addition, we differentiate ourselves to consumers through the ability to developuse our products and services across multiple commerce channels, including e-commerce, mobile, and payments at the point of sale;
and our ability to simplify and personalize shopping experiences. We believe that we compare favorably to our competitors with respect to these factors and we invest resources towards improving our products and services, offering choice in payment options, providing excellent customer service, experience;and building brands that merchants and consumers trust.
Our business faces competition from a wide range of businesses and preference;
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In addition to the discussion in this section, see “Item 1A. Risk Factors” under the caption “We face substantial and increasingly intense competition worldwide in the global payments industry”for further discussion of the potential impact of competition on our business.
Our ability to grow revenue is affected by, among other things, consumer spending patterns, merchant and Developmentconsumer adoption of digital payment methods, the expansion of multiple commerce channels, the growth of mobile devices and merchant and consumer applications on those devices, the growth of consumers globally with internet and mobile access, the pace of transition from cash and checks to digital forms of payment, our share of the digital payments market, and our ability to innovate and introduce new products and services that merchants and consumers value. Our strategy to drive growth in our business includes the following:
•Growing our core business: through expanding our global capabilities, customer base and scale, increasing our customers’ use of our products and services by better addressing their everyday needs related to accessing, managing, and moving money, and expanding the adoption of our solutions by merchants and consumers;
•Expanding our value proposition for merchants and consumers: by being technology and platform agnostic, partnering with our merchants to grow and expand their business online and in-store, and providing consumers with simple, secure, and flexible ways to manage and move money across different markets, merchants, and platforms;
•Forming strategic partnerships:by building new strategic partnerships to provide better experiences for our customers, offering greater choice and flexibility, acquiring new customers, and reinforcing our role in the payments ecosystem; and
•Seeking new areas of growth: organically and through acquisitions and strategic investments in our existing and new international markets around the world and focusing on innovation both in the digital and physical world.
In 2021, we intend to further enhance our PayPal and Venmo digital wallets to increase their functionality and drive higher engagement on our Payments Platform. Our goal is to provide our consumers with a comprehensive set of services to manage their finances and enhance their ability to shop online and in person.
TECHNOLOGY
Our Payments Platform utilizes a combination of proprietary and third-party technologies and services intended to efficiently and securely facilitate transactions between millions of merchants and consumers worldwide across different channels, markets, and networks. Our Payments Platform connects with financial service providers around the world and allows consumers to make purchases using a wide range of payment methods, regardless of where a merchant is located. Consumers who use our Payments Platform can send payments in more than 200 markets around the world and in more than 100 currencies, withdraw funds to their bank accounts in 56 currencies, and hold balances in their PayPal accounts in 25 currencies.
A transaction on our Payments Platform can involve multiple participants in addition to us, including a merchant, a consumer, and the consumer’s funding source provider. We have developed intuitive user interfaces, customer tools, transaction completion database, and network applications on our Payments Platform designed to enable our customers to utilize our suite of products and services. Our Payments Platform, open application programming interfaces, and developer tools are designed to enable developers to innovate with ease and offer robust applications to our global ecosystem of merchants and consumers, while at the same time maintaining the security of our customers’ information.
The technology infrastructure supporting our Payments Platform simplifies the storage and processing of large amounts of data and facilitates the deployment and operation of large-scale global products and services in both our own data centers and when hosted by third party cloud service providers. Our technology infrastructure is designed around industry best practices intended to reduce downtime and help ensure the resiliency of our Payments Platform in the event of outages or catastrophic occurrences. Our Payments Platform incorporates multiple layers of protection for business continuity and system redundancy purposes and to help mitigate cybersecurity risks. We have a comprehensive cybersecurity program designed to protect our technology infrastructure and Payments Platform against cybersecurity threats, which includes regularly testing of our systems to identify and address potential vulnerabilities. We strive to continually improve our technology infrastructure and Payments Platform to enhance the customer experience and to increase efficiency, scalability, and security.
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For additional information regarding risks relating to our technology infrastructure and cybersecurity, see the information in “Item 1A. Risk Factors” under the captions “Cyberattacks and security vulnerabilities could result in serious harm to our reputation, business, and financial condition” and “Business interruptions or systems failures may impair the availability of our websites, applications, products or services, or otherwise harm our business.”
RESEARCH AND DEVELOPMENT
Total research and development expense was $1.4 billion in 2020 and $1.1 billion $1.1 billionin both 2019 and $953 million in 2019, 2018 and 2017, respectively.2018.
The protection of our intellectual property, including our trademarks, patents, copyrights, domain names, trade dress, and trade secrets, is important to the success of our business. We seek to protect our intellectual property rights by relying on applicable laws and regulations in the U.S. and internationally, as well as a variety of administrative procedures. We have registered our core brands as domain names and as trademarks in the U.S. and a large number of otherinternational jurisdictions. We also have in place an active program to continue to secure and enforce trademarks and domain names that corresponds to our brands in markets of interest. We have filed patent applications in the U.S. and in international jurisdictions covering certain aspects of our proprietary technology and new innovations. We also rely on contractual restrictions to protect our proprietary rights when offering or procuring products and services. We have routinely entered into confidentiality and invention assignment agreements with our employees and contractors, and non-disclosure agreements with parties with whom we conduct business to control access to, and use and disclosure of, our proprietary information.
For additional information regarding some of the risks relating to our intellectual property, including costs of protecting our intellectual property, see the information in “Item 1A. Risk Factors” under the captions “WeThird parties may allege that we are subject to patent litigationinfringing their patents and other intellectual property rights"” and “We may be unable to adequately protect or enforce our intellectual property rights or third parties may allege that we are infringing their intellectual property rights.”
GOVERNMENT REGULATION
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus by regulators globally on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on such important issues asindustry, including 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 theThe 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 how such laws and regulations are interpreted and implemented,changes to their interpretation or 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. Therefore, weWe monitor these areas closely to designand are focused on designing compliant solutions for our customers who depend on us.customers.
Government regulation impacts key aspects of our business. We are subject to regulations that affect the payments industry in the markets we operate.
Payments Regulation. Various laws and regulations govern the payments industry in the U.S. and internationally. In the U.S., PayPal, Inc. (a wholly-owned subsidiary) holds licenses to operate as a money transmitter (or its equivalent), which, in the states where such licenses are required, as well as in the District of Columbia and certain territories. These licenses include not only the PayPal branded products and services offered in these locations, but also our Venmo, Hyperwallet and Xoom products and services to the extent offered in these locations. As a licensed money transmitter, PayPal is subject to, among other things, subjects PayPal, Inc.requirements, restrictions with respect to reporting requirements, bonding requirements, limitations on the investment of customer funds, reporting requirements, bonding requirements, and inspection by state regulatory agencies. In certain cases, these licenses also generally cover PayPal’s service enabling customers to buy, hold, and sell cryptocurrency directly from their PayPal account, which is currently available only in the U.S. In the State of New York, PayPal has obtained a conditional virtual currency license from the New York Department of Financial Services to offer cryptocurrency services in the state in partnership with Paxos Trust Company. Outside the U.S., we provide similar services customized for various countries and foreign jurisdictions through our foreign subsidiaries. The activities of those non-U.S. entities are, or may be, supervised by a financial regulatory authority in the jurisdictions in which they operate. Among other regulatory authorities, the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”), the Australian Prudential Regulation Authority, the People’s Bank of China, the Monetary Authority of Singapore, the Reserve Bank of India, the Central Bank of Russia, and the Central Bank of Brazil and the People's Bank of China have asserted jurisdiction over some or all of our activities in their respective jurisdictions. This list is not exhaustive, and there are numerous other regulatory agencies that have or may assert jurisdiction over our activities. The laws and regulations applicable to the payments industry in any given jurisdiction are subject to interpretation and change.
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In addition, financial services regulators in various jurisdictions, including the U.S. and the European Union (“EU”), have implemented authentication requirements for banks and payment processors intended to reduce online fraud, which could impose significant costs, make it more difficult for new customers to join PayPal, and reduce the ease of use of our products.
Banking Agency Supervision.We serve our customers in the European Union (“EU”)EU through PayPal (Europe) S.à.r.l. et Cie, SCA, a wholly-owned subsidiary that is licensed and subject to regulation as a bank in Luxembourg by the CSSF. Consequently, we must comply with rules and regulations of the European banking industry, including those related to capitalization, funds management, corporate governance, anti-money laundering, disclosure, reporting, and inspection. We are, or may be, subject to banking-related regulations in other countries now or in the future related to our role in the financial industry. In addition, based on our relationships with our partner financial institutions, we are, or may be, subject to indirect regulation and examination by these financial institutions’ regulators.
Lending Regulation. PayPal’s U.S. consumer short-term installment loan product is subject to state lending laws (some of which require licensure and/or state regulator notification), state collection laws, as well as compliance with the Equal Credit Opportunity Act and Regulation B as implemented by the Consumer Financial Protection Bureau (the “CFPB”) and other applicable laws and regulations.
Consumer Financial Protection Bureau. The Consumer Financial Protection Bureau (the “CFPB”)CFPB has significant authority to regulate consumer financial products in the U.S., including consumer credit, deposits, payments, and similar products. As a large market participant of remittance transfers, the CFPB has direct supervisory authority over our business. The CFPB and other similar regulatory agencies in other jurisdictions may have broad consumer protection mandates that could result in the promulgation and interpretation of rules and regulations that may affect our business.
Anti-Money Laundering, Counter-Terrorist Financing, and Counter-Terrorist Financing.Sanctions. PayPal is subject to anti-money laundering (“AML”) laws and regulations in the U.S. and other jurisdictions, as well as laws designed to prevent the use of the financial systems to facilitate terrorist activities. Our AML program is designed to prevent our payment networkPayments Platform from being used to facilitate money laundering, terrorist financing, and other illicit activities, or to do business in countries or with persons and entities included on designated country or person lists promulgated by the U.S. Department of the Treasury’s Office of Foreign Assets Controls (“OFAC”) and equivalent authorities in other countries. Our AML and sanctions compliance programs, overseen by our AML/Bank Secrecy Act Officer, is composed of policies, procedures, and internal controls, and is designed to address these legal and regulatory requirements and assist in managing money laundering and terrorist financing risks.
Interchange Fees. Interchange fees associated with four-party payments systems are being reviewed or challenged in various jurisdictions. For example, in the EU, the Multilateral Interchange Fee (“MIF”) Regulation caps interchange fees for credit and debit card payments and provides for business rules to be complied with by any company dealing with payment card transactions, including PayPal. As a result, the fees that we collect in certain jurisdictions may become the subject of regulatory challenge.
Data Protection and Information Security. Aspects of our operations or businessWe are subject to a number of laws, rules, directives, and regulations (“privacy and data protection regulationlaws”) relating to the collection, use, retention, security, processing, and transfer (collectively, “processing”) of personally identifiable information about our customers, our merchants’ customers, and employees (“personal data”) in the U.S.,countries where we operate. Our business relies on the processing of personal data in many jurisdictions and the movement of data across national borders. As a result, much of the personal data that we process, which may include certain financial information associated with individuals, is subject to one or more privacy and data protection laws in one or more jurisdictions. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between or among us, our subsidiaries, and other parties with which we have commercial relationships. The EU Asia Pacific, and elsewhere. For example, the EUhas adopted a comprehensive General Data Protection Regulation (the “GDPR”), which came into effect in May 2018. GDPR expanded the scope of the EU data protection law to foreign companies processing personal data of European Economic Area (“EEA”) individuals and imposed a stricter data protection compliance regime. In the U.S., we are subject to privacy and information safeguarding requirements under the Gramm-Leach-Bliley Act andas well as the California Consumer Privacy Act, that require similarwhich requires privacy protections comparable to those afforded by the GDPR, as well as the maintenance of a written, comprehensive information security program. In Europe, the operations of our Luxembourg bank are subject to confidentiality and information safeguarding requirements under the Luxembourg Banking Act.
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PayPal relies on a variety of compliance methods to transfer personal data of EEA individuals to the U.S., including reliance on Binding Corporate Rules (“BCRs”) for internal transfers of certain types of personal data and Standard Contractual Clauses (“SCCs”). PayPal must also ensure that third parties processing personal data of PayPal’s EEA customers and/or employees outside of the EEA have compliant transfer mechanisms. In July 2020, the European Court of Justice (“ECJ”) invalidated the U.S.-EU Privacy Shield - safe harbor framework that was previously relied upon by some PayPal vendors, and PayPal entered into SCCs with those third parties. PayPal did not certify under the Privacy Shield regime and continues to use SCCs and BCRs as the primary cross border data transfer mechanisms. However, the ECJ ruling made clear that these transfer mechanisms will be subject to additional scrutiny as well. To the extent PayPal relies on SCCs, or any third party relies on the Privacy Shield regime for the compliant transfer of personal data, PayPal’s ability to process EEA personal data to such parties could be jeopardized.
Regulatory scrutiny of privacy, data protection, cybersecurity practices, and the processing of personal data is increasing around the world. Regulatory authorities around the world are continuously considering numerous legislative and regulatory proposals concerning privacy and data protectioninterpretive guidelines that may contain additional privacy and data protection obligations. In addition, the interpretation and application of these privacy and data protection laws in the U.S., Europe, and elsewhere are often uncertain and in a state of flux.
Anti-Corruption. PayPal is subject to applicable anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, and similar anti-corruption laws in the jurisdictions in which we operate. Anti-corruption laws generally prohibit offering, promising, giving, accepting, or authorizing others to provide anything of value, either directly or indirectly, to or from a government official or private party in order to influence official action or otherwise gain an unfair business advantage, such as to obtain or retain business. We have implemented policies, procedures, and internal controls that are designed to comply with these laws and regulations.
Additional Regulatory Developments. Various regulatory agencies continue to examine and implement laws governing a wide variety of issues, including virtual currencies, identity theft, account management guidelines, privacy, disclosure rules, cybersecurity, and marketing, thatwhich may impact PayPal’s business.
For an additional discussion on governmental regulation affecting our business, please see the risk factors related to regulation of our payments business and regulation in the areas of consumer privacy, data use, and/or security in “Item 1A. Risk Factors” under the caption “Risk Factors That May Affect Our Business, Results of Operations, and Financial Condition” and “Item 3. Legal Proceedings” included elsewhere in this Annual Report on Form 10-K.
At PayPal, we consider the management of our global talent (human capital) to net revenues. No individual quarter in 2019, 2018 or 2017 accounted for more than 30%be essential to the ongoing success of annual net revenue.
our business. As of December 31, 2019,2020, we employed approximately 23,20026,500 people globally, of whomrepresenting approximately 11,200 were150 nationalities, located in more than 30 countries, including approximately 12,300 located in the U.S.
Attracting, recruiting, developing, and retaining diverse talent enables us to provide our customers with products and services that help them to thrive in the global economy, and serve our stakeholders. We consider our relationship withare focused on supporting our employees across the full employee lifecycle from recruitment to be good.onboarding to development, and have implemented programs designed to promote their total wellness, particularly during difficult times such as the COVID-19 pandemic. For example, in 2020, we enhanced our Crisis Leave Program, provided flexible work arrangements, and adjusted our benefits to include additional mental health support.
We use employee feedback to directly inform the ongoing development of our employee programs. In addition to administering an annual survey to gather input from eBay Inc.our global workforce, we conducted regular wellness surveys throughout the COVID-19 pandemic to get real-time feedback from our employees. For our 2020 annual employee survey, we heard from 85% of our global employees. Our engagement score, which reflects employees that would recommend PayPal to their peers and/or are happy at PayPal was 84%, representing a four percentage point increase compared to 2019. In 2020, we continued to enhance our employee programs based on results from our 2019 survey and other employee input. For example, we established in-person feedback sessions to improve efficiencies, enhanced employee communication strategies, and launched additional learning and development programs. We also evaluate employee survey responses for feedback on other key components of our culture and programs. The detailed scores are shared across the organization and analyzed to understand differences by geography, demographics, and job level, and to identify opportunities for further improvement.
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Talent Acquisition and Development
As a leading technology platform and digital payments company, we compete for top global talent around the purposeworld. We believe that a strong culture focused on employee experiences that enables advancement, learning, and individual career insights is essential to the successful acquisition, retention, and development of owningdiverse talent. To that end, we have implemented programs focused on inclusive hiring practices, enriched virtual new hire experiences, individual coaching, and operating eBay’s Payments business in connection withmentorship programs, and provided ongoing learning opportunities, including unlimited access to LinkedIn Learning.
Employee Wellness
We remain focused on promoting the separationtotal wellness of our employees, including resources, programs and distribution described below. eBay completedservices to support our employees’ physical, mental, and financial wellness. As part of our integrated approach to benefits, we have made strengthening employee financial wellness a strategic priority at PayPal. In late 2019, we designed an inclusive program that raised wages (where appropriate), lowered the transfercost of substantiallyU.S. healthcare benefits for hourly-wage earners, offered new financial tools and resources, and granted equity or equity-based awards to all employees of the assets, liabilities,company, subject to legal limitations. We continue to extend this initiative and operationsrecently added resources for employees to improve their cash flow through access to early earned wages and modified retirement programs in select global markets.
Diversity, Inclusion, Equity, and Belonging
Our focus on fostering diversity, inclusion, equity, and belonging (“DIEB”) is critical to our global talent strategy and pivotal to building a culture that embraces individual characteristics, values diversity, minimizes barriers, and enhances feelings of eBay’s Payments businesssecurity and support across the workplace. We are committed to PayPalequal pay for equal work, promoting enterprise-wide inclusive learning opportunities, and partnering with leading organizations to embed DIEB considerations into our talent strategy. We empower eight employee resource groups to promote community and authenticity for employees that identify as Black, Latinx, women, interfaith, veterans, LGBTQ+, Asian, and disabled persons. These groups drive ongoing employee engagement around the world for all employees, regardless of background, to support and champion their peers and related causes. In 2020, we also announced a targeted commitment to support Black- and minority-owned businesses, and underrepresented communities and employees, including additional financial commitments to enhance our employee resource groups, cultivate diverse talent pipelines, and create inclusive onboarding and skill building opportunities.
As part of our annual environmental, social, and governance (“ESG”) reporting, we provide additional information on our global talent strategy, including detailed representation metrics, in June 2015. Prior to the contribution of the Payments business, PayPal Holdings, Inc. had no operations. On July 17, 2015 (the “distribution date”), PayPal became an independent publicly traded company through the pro rata distribution by eBay of 100% of the outstanding common stock of PayPal to eBay stockholders (which we refer to as the “separation” or the “distribution”). Each eBay stockholder of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held on the record date. Approximately 1.2 billion shares of PayPal common stock were distributed on July 17, 2015 to eBay stockholders. PayPal’s common stock began “regular way” trading under the ticker symbol “PYPL” on the NASDAQour Global Select Market on July 20, 2015.Impact Report available at https://investor.pypl.com/esg-strategy/default.aspx.
The address of our principal executive offices is PayPal Holdings, Inc., 2211 North First Street, San Jose, California 95131. Our website is located at www.paypal.com, and our investor relations website is located at http:https://investor.paypal-corp.com.investor.pypl.com. From time to time, we may use our investor relations site and other online and social media channels, including ourthe PayPal Newsroom (https://newsroom.paypal-corp.com/), PayPal Stories Blog (https://www.paypal.com/stories/us), Twitter handles (@PayPal and @PayPalNews), LinkedIn page (https://www.linkedin.com/company/paypal), Facebook page (https://www.facebook.com/PayPalUSA/), YouTube channel (https://www.youtube.com/paypal), Dan Schulman’s LinkedIn profile (https://www.linkedin.com/in/dan-schulman/), John Rainey’s LinkedIn profile (www.linkedin.com/in/john-rainey-pypl), and Dan Schulman’s Facebook page (https://www.facebook.com/DanSchulmanPayPal/) to disclose material non-public, and Dan Schulman’s Instagram page (https://www.instagram.com/dan_schulman/) as a means of disclosing information about the Company and complyfor complying with our disclosure obligations under Regulation Fair Disclosure (“FD”). Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge on our investor relations website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The content of our websites and information we may post on or provide to online and social media channels, including those mentioned above, and information that can be accessed through our websites or these online and social media channels is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites or these online and social media channels are intended to be inactive textual references only.
ITEM 1A. RISK FACTORS
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The global payments industry is highly competitive, rapidly changing, highly innovative,novel coronavirus (“COVID-19”) pandemic could materially and increasingly subject to regulatory scrutiny and oversight. We compete against a wide range of businesses, including those that are larger than we are, have greater name recognition, longer operating histories, or a dominant or more secure position, or offer other products and services to consumers and merchants that we do not offer, as well as smaller or younger companies that may be more agile in responding quickly to regulatory and technological changes. Many of the areas in which we compete evolve rapidly with changing and disruptive technologies, shifting user needs, and frequent introductions of new products and services. Competition also may intensify as businesses enter into business combinations and partnerships, and established companies in other segments expand to become competitive with different aspects of our business.
There are no comparable recent events that provide guidance as to the effect that the spread of COVID-19 as a global pandemic may have. The ultimate extent to which the COVID-19 pandemic impacts our business, financial condition, and results of operations will depend on future developments, which are highly uncertain, difficult to predict, and cash flows, as wellsubject to change, including, but not limited to, the duration, scope, severity, and geographic spread of the outbreak, its impact on the global economy, actions taken to contain or limit the impact of COVID-19, such as the trading priceavailability of an effective vaccine or treatment, geographic variation in how countries and states are handling the pandemic, and how quickly and to what extent normal economic and operating conditions may potentially resume.
The COVID-19 pandemic has adversely impacted and is likely to further adversely impact the operations of our common stock.
•Merchants selling goods or services in advance of the date of their delivery (e.g., travel and events verticals) or experiencing bankruptcy, insolvency, business failure, or other business interruption, which could result in our becoming liable to the buyers of such goods or services through our buyer protection program or through chargebacks on payment cards used by customers to fund their payments;
•Merchants who utilize PayPal branded merchant credit products such as PayPal Working Capital and PayPal Business Loan products or consumers who utilize PayPal branded consumer credit products defaulting on their payment obligations;
•Increased cybersecurity and payment fraud risk related to COVID-19, as cybercriminals attempt to profit from the disruption in light of increased online banking, e-commerce, and other online activity;
•Challenges to the availability and reliability of our products and services resulting from changes to our normal operations, including due to one or more clusters of COVID-19 cases occurring at our (or our service providers’) sites or mandatory local lock-down requirements, which may impact our employees, our level of customer service, and/or the systems or employees of our customers and business partners; and
•An increased volume of customer requests for support and regulatory requests for information and support or additional regulatory requirements, which could require additional resources and costs to address.
Additionally, COVID-19 has negatively impacted the financial viability and operations of merchants in certain verticals (such as travel and events) and, as a result, allowances for transaction and credit losses may not accurately reflect the amount of losses that PayPal may be exposed to by these merchants. Further, we may not have the ability to accurately forecast the magnitude of such losses or any additional merchant segments that could be adversely impacted by COVID-19.
Our business has benefited from the shift from in-store shopping and traditional payment methods towards e-commerce and digital payments, including a varietysignificant increase in net new active accounts and payments volume. To the extent that customer preferences revert to pre-COVID-19 behaviors as mitigation measures to limit the spread of factors, includingCOVID-19 are lifted or relaxed and an effective vaccine or treatments for COVID-19 becomes available, our business, financial condition, and results of operations could be adversely impacted.
The significant increase in the risks set forth in this “Risk Factors” section. It is difficult for us to forecast accurately the level or sourcenumber of our revenues or earnings. In view of the rapidly evolving nature of our business, period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon them as an indication of future performance. Due to the inherent difficulty in forecasting revenues, it is also difficult to forecast expenses. Quarterly and annual expenses reflected in our financial statements may be significantly different from historical or projected rates. Our operating results in one or more future quarters may fall below the expectations of securities analysts and investors. The trading price of our common stock may decline significantlyemployees who are working remotely as a result of the factors describedpandemic, and an extended period of remote work arrangements and subsequent reintroduction into the workplace could introduce operational risk, increase cybersecurity risk, strain our business continuity plans, negatively impact productivity, and give rise to claims by employees or otherwise adversely affect our business. Additionally, COVID-19 could require new or modified processes, procedures, and controls to respond to changes in this paragraph.
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The impacts of transactions on our Payments Platform. In addition, any financial turmoil affecting the banking systemCOVID-19, individually or financial markets could cause additional consolidation of the financial services industry, significant failures of financial service institutions, new or incremental tightening in the credit markets, low liquidity, and extreme volatility or distress in the fixed income, credit, currency, and equity markets, whichcollectively, could have a material adverse impact on our business. See alsobusiness, financial condition, and results of operations and have the risk factor captioned, “The United Kingdom's departure fromeffect of heightening or exacerbating many of the EU could adversely affect us.other risks described in this “Risk Factors” section.
CYBERSECURITY AND TECHNOLOGY RISKS
Cyberattacks and security vulnerabilities could result in serious harm to our reputation, business, and financial condition.
The techniques used to obtain unauthorized, improper, or illegal access to systems and information (including customers’ personal data), disable or degrade service, or sabotage systems are constantly evolving, and have become increasingly complex and sophisticated, may be difficult to detect quickly, and often are not recognized or detected until after they have been launched against a target. Unauthorized parties have attempted, and we expect that they will continue to attempt, to gain access to our systems or facilities through various means, including, but not limited to, hacking into our systems or facilities or those of our customers, partners, or vendors, and attempting to fraudulently induce users of our systems (including employees and our customers) into disclosing user names, passwords, payment card information, or other sensitive information. This information which may in turn be used to access our customers’ personal or proprietary information and payment card data that are stored on or accessible through our information technology systems. Threats can come from a varietysystems and those of sources, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, and insider threats. Certain efforts may be supported by significant financial and technological resources, making them even more sophisticated and difficult to detect.third parties with whom we partner. Numerous and evolving cybersecurity threats, including advanced and persisting cyberattacks, cyberextortion, spear phishing and social engineering schemes, the introduction of computer viruses or other malware, and the physical destruction of all or portions of our information technology and infrastructure and those of third parties with whom we partner could compromise the confidentiality, availability, and integrity of the data in our systems. We believe that PayPal is a particularly attractive target for such breaches and attacks due to our name and brand recognition and the widespread adoption and use of our products and services. Although we have developed systems and processes designed to protect data we manage, prevent data loss and other security breaches and effectively respond to known and potential risks, and expect to continue to expend significant resources to bolster these protections, there can be no assurance that these security measures will provide absolute security or prevent breaches or attacks.
services.
Any cyberattacks or data security breaches affecting the information technology or infrastructure of companies we acquire or of our customers, partners, or vendors (including data center and cloud computing providers) could have similar negative effects. See Note 4—“Business Combinations,” Note 5—“Goodwill and Intangible Assets” and Note 13—“Commitments and Contingencies” to our consolidated financial statements for disclosure relating toFor example, in November 2017, we suspended the suspension of operations of TIO Networks (“TIO”) (which we acquired(acquired in July 2017) as part of an investigation of security vulnerabilities of the TIO platform. Actual or perceived vulnerabilities or data breaches have ledIn December 2017, we announced that we had identified evidence of unauthorized access to TIO’s network and the potential compromise of personally identifiable information for approximately 1.6 million TIO customers. This incident resulted in governmental inquiries and civil claims against us and may lead to additional inquiries and claims against us.in the future.
Our systems and operations and those of our service providers and partners have experienced from time to time, and may experience in the future servicebusiness interruptions or degradation because of hardware and software defects or malfunctions, distributed denial-of-service and other cyberattacks, insider threats, hardware and software defects or malfunctions, human error, earthquakes, hurricanes, floods, fires, and other natural disasters, public health crises (including pandemics), power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses or other malware, or other events. We have experienced from time toOur corporate headquarters are located in the Silicon Valley, a seismically active region in California. A catastrophic event that results in a disruption or failure of our systems or operations could result in significant losses and require substantial recovery time and may experience in the future, disruptions insignificant expenditures to resume or maintain operations, which could have a material adverse impact on our systems due to break-ins, sabotage,business, financial condition, and intentional actsresults of vandalism. Someoperations. Additionally, some of our systems, including systemsthose of companies we have acquired, are not fully redundant, and our disaster recovery planning may not be sufficient for all possible outcomes or events. In addition, asAs a provider of payments solutions, we are subject to heightened scrutiny by regulators that may require specific business continuity, resiliency and disaster recovery plans, and more rigorous testing of such plans, which may be costly and time-consuming to implement, and may divert our resources from other business priorities.
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We have experienced, and expect to continue to experience system failures, denial-of-service attacks, and other events or conditions from time to time that interrupt the availability, or reduce or adversely affect the speed or functionality, of our products and services. These events have resulted and likely will continue to result in loss of revenue. A prolonged interruption in the availability or reduction in the availability, speed, or functionality of our products and services could materially harm our business. Frequent or persistent interruptions in our services could cause current or potential customers or partners to believe that our systems are unreliable, leading them to switch to our competitors or to avoid or reduce the use of our products and services, and could permanently harm our reputationrelationship with our customers and brands.partners and our reputation. Moreover, if any system failure or similar event results in damages to our customers or their business partners, these customers or partners could seek significant compensation or contractual penalties from us for their losses, and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address, and could have other consequences described in this “Risk Factors” section under the caption “Cyberattacks and security vulnerabilities could result in serious harm to our reputation, business, and financial condition.condition.”
Our Payments Platform has experienced and may in the future experience intermittent unavailability. The full-time availability and expeditious delivery of our products and services is critical to our goal of gaining widespread acceptance among consumers and merchants for digital payments. We have undertaken and continue to undertake certain system upgrades and re-platforming efforts designed to improve our reliability, resiliency, and speed. These efforts are costly and time-consuming, involve significant technical risk, and may divert our resources from new features and products, and there can be no guarantee that these efforts will succeed. Because we are a regulated financial institution in certain jurisdictions, frequentFrequent or persistent site interruptions could lead to regulatory scrutiny, significant fines and penalties, and mandatory and costly changes to our business practices, and ultimately could cause us to lose existing licenses that we need to operate or prevent or delay us from obtaining additional licenses that may be required for our business.
We also rely on facilities, components, applications, and services supplied by third parties, including data center facilities and cloud storage services, which subjects us to risks in the nature of those discussed in this “Risk Factors” section under the captions “We rely on third parties in many aspects of our business, which creates additional risk.”services. From time to time, such third parties have ceased to provide us with such facilities and services. Additionally, ifIf these third parties experience operational interference or disruptions (including a cybersecurity incident), breach their agreements with us, or fail to perform their obligations and meet our expectations, or experience a cybersecurity incident, our operations could be disrupted or otherwise negatively affected, which could result in customer dissatisfaction, regulatory scrutiny, and damage to our reputation and brands, and materially and adversely affect our business. While we maintain business interruption insurance, our coverageit may not be insufficientsufficient to compensatereimburse us for all losses that may result fromcaused by interruptions in our service as a result of systems failures and similar events.
In addition, we are continually improving and upgrading our information systems and technologies. Implementation of new systems and technologies is complex, expensive, and time-consuming. If we failany failure to timely and successfully implement new information systems and technologies, or improvements or upgrades to existing information systems and technologies or if such systems and technologies do not operate as intended, thisin a timely manner could have an adverse impact on our business, internal controls (including internal controls over financial reporting), results of operations, and financial condition.
Rapid, significant, and disruptive technological changes impact the industries in which we operate, for example, payment technologies (including real-time payments, payment card networkstokenization, virtual currencies, distributed ledger and blockchain technologies, and proximity payment technology such as NFC and other contactless payments); internet browser technologies, that enable users to easily store their payment card information for use on any retail or bank fees, rules, or practices could harme-commerce website; artificial intelligence and machine learning; developments in technologies supporting our business.regulatory and compliance obligations; and in-store, digital, mobile, and social commerce.
We expect new services and technologies to continue to emerge and evolve, and we cannot predict the effects of technological changes on our business. We rely in part on banksthird parties, including some of our competitors, for the development of and access to new or other payment processorsevolving technologies. These third parties may restrict or prevent our access to, process transactions and pay fees for their services. From time to time, payment card networks have increased, and may continue to increase in the future, the interchange fees and assessments that they charge for transactions that access their networks. Payment card networks have imposed, and may impose in the future, special fees or assessments for transactions that are executed through a digital wallet such as PayPal’s, which could negatively impact us and significantly increase our costs. Our payment card processors may have the right to pass any increases in interchange fees and assessments on to usutilization of, those technologies, as well as increase their own fees for processing,platforms or products. We may not be able to accurately predict which could increasetechnological developments or innovations will become widely adopted and how those technologies may be regulated. We expect that new services and technologies applicable to the industries in which we operate will continue to emerge and may be superior to, or render obsolete, the technologies we currently use in our operating costsproducts and reduceservices. Developing and incorporating new technologies into our operating income. We have entered into strategic partnerships with Visa, Mastercardproducts and services may require significant investment, take considerable time, and ultimately may not be successful. Our ability to adopt new products and services and to develop new technologies may be limited or restricted by industry-wide standards, platform providers, payments networks, changes to laws and regulations, changing expectations of consumers or merchants, third-party intellectual property rights, and other credit card networks to further expand our relationships in a way thatfactors. Our success will make it easier for merchants to accept and consumers to choose to pay with their respective credit cards and debit cards. During the terms of these agreements, Visa and Mastercard have each agreed to not enact or impose any fees or rules that solely target PayPal. Upon termination of the agreements, PayPal could become subject to special digital wallet fees or other special assessments.
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Our business is subject to extensive government regulation and oversight. Our failure to comply with extensive, complex, overlapping, and frequently changing rules, regulations, and legal interpretations could materially harm our business.
Our business is subject to complex and changing laws, rules, regulations, policies, and legal interpretations in the markets in which we operate, including, but not limited to, those governing:
As we introduce new products and services and expand into new markets, including through acquisitions, we may become subject to additional regulations, restrictions, and licensing requirements. As we expand and localize our international activities, we have become increasingly obligated to comply with the laws ofexpect that our obligations in the markets in which we operate.operate will continue to increase. In addition, because our services are accessible worldwide and we facilitate sales of goods and provide services to customers worldwide, one or more jurisdictions may claim that we or our customers are required to comply with their laws. Laws regulating the internet, mobile, and related technologies outside of the U.S. oftenlaws which may impose different, more specific, or even conflicting obligations on us, as well as broader liability. For example, certain transactions that may be permissible in a local jurisdiction may be prohibited by regulations of U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) or U.S. anti-money laundering or counter-terrorist financing regulations.
Any failure or perceived failure to comply with existing or new laws, regulations, or orders of any government authority (including changes to or expansion of the interpretation of those laws, regulations, or orders), including those discussed in this risk factor,their interpretation) may subject us to significant fines, penalties, criminal and civil lawsuits, forfeiture of significant assets, and enforcement actions in one or more jurisdictions; result in additional compliance and licensure requirements; cause us to lose existing licenses or prevent or delay us from obtaining additional licenses that may be required for our business; increase regulatory scrutiny of our business; divert management’s time and attention from our business; restrict our operations; andlead to increased friction for customers; force us to changemake changes to our business practices, make productproducts or operational changes,operations; require us to engage in remediation activities; or delay planned transactions, product launches or improvements. Any of the foregoing could, individually or in the aggregate, harm our reputation, damage our brands and business, and adversely affect our results of operations and financial condition. The complexity of U.S. federal and state and international regulatory and enforcement regimes, coupled with the global scope of our operations and the evolving global regulatory environment, could result in a single event prompting a large number of overlapping investigations and legal and regulatory proceedings by multiple government authorities in different jurisdictions. We have implemented policies and procedures designed to help ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors, and agents will not violate such laws and regulations.
Payments Regulation
In the U.S., PayPal, Inc. has obtained(a wholly-owned subsidiary) holds licenses to operate as a money transmitter (or its equivalent) in the states where such licenses are required, as well as in the District of Columbia the U.S. Virgin Islands, and Puerto Rico. These licenses include not only the PayPal branded products and servicescertain territories (as described further in these states, but also our Braintree, Venmo, and Xoom products and services. We may also maintain such licenses for certain companies that we have acquired, such as Hyperwallet. As a licensed money transmitter, PayPal is subject to, among other requirements, restrictions with respect to the investment“Item 1. Business – Government Regulation” of customer funds, reporting requirements, bonding requirements, and inspection by state regulatory agencies. Accordingly, ifthis Form 10-K). If we violate thesethe laws or regulations covered under our licenses, we could be subject to liability and/or additional restrictions, forced to cease doing business with residents of certain states, forced to change our business practices, or required to obtain additional licenses or regulatory approvals, which could impose substantial costs.
While we currently allow our customers with payment cards to send payments from approximately 200 markets, we allow customers in only approximately half of those markets (including the U.S.) to also receive payments, in some cases with significant restrictions on the manner in which customers can hold balances or withdraw funds. These limitations may adversely affect our ability to grow our business in these markets.
We principally provide our services to customers in the EUEuropean Union (“EU”) and the United Kingdom (“U.K.”) through PayPal (Europe) S.à r.l. et Cie, S.C.A (“PayPal (Europe)”), our wholly-owned subsidiary that is licensed and subject to regulation as a credit institution in Luxembourg. Accordingly, PayPal (Europe) is potentially subject to significant fines or other enforcement action if it violates the disclosure, reporting, anti-money laundering, capitalization, corporate governance, privacy, data protection, data governance, information security, banking secrecy, taxation, risk management, sanctions, or otherapplicable requirements imposed on Luxembourg credit institutions. In addition,Additionally, compliance with EU laws and regulations are subject to potentially inconsistent interpretations by the countries that are members of the EU, which can make compliancecould become more costly and operationally difficult to manage. Moreover, the countries that are EU members may each have different andmanage due to potentially inconsistent interpretations and domestic regulations implementingby EU member countries. European Directives, which could make compliance more costly and operationally difficult to manage. Thesuch as the Revised Payment Services Directive (“PSD2”) took effect in Europe in 2018, with certain requirements becoming applicable from 2019 or later. PSD2 enables newenabling payment and account information sharing models wherebyby regulated payment providers, are able to access bank and payment accounts (including PayPal accounts) for the purposes of accessing account information or initiating a payment on behalf of a customer. Such access could subject us to data security and other legal and financial risks and could create new competitive forces and new types of competitors in the European payments market. PSD2 also imposes new standards for payment security and strong customer authentication (“SCA”) that may make it more difficult and time consuming to carry out a PayPal transaction, which may adversely impact PayPal’s European customer value proposition. SCA was implemented in 2019. In line with an opinion issued by the European Banking Authority (“EBA”), national competent authorities (including Luxembourg) have announced enforcement deferral periods for migration to SCA requirements for e-commerce card-based transactions. PayPal (Europe) has implemented SCA customer processes covering the majority of payment transactions initiated within the EU and has plans to finalize full compliance with SCA; amending or accelerating these plans may adversely impact PayPal’s European customer value proposition.
risks. If the business activities of PayPal (Europe) exceed certain thresholds, or if the European Central Bank (“ECB”) so determines, PayPal (Europe) may be deemed a significant supervised entity such that someand certain activity of PayPal (Europe) could become directly regulatedsupervised by the ECB, rather than by the CSSF the(the Luxembourg regulator regulator), as its national supervisor, which
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could subject us to additional requirements and would likely increase compliance costs.
In many of the other markets outside the U.S. in which we do business, we serve our customers through PayPal Pte. Ltd., our wholly-owned subsidiary based in Singapore. PayPal Pte. Ltd. is supervised by the Monetary Authority of Singapore and designated as a holder of a stored value facility,(“MAS”), but does not hold a remittance license. As a result, PayPal Pte. Ltd. is not able to offer outbound remittance payments from Singapore, and can only offer payments for the purchase of goods and services in Singapore. In many of the markets (other than Singapore) served by PayPal Pte. Ltd., it is unclear and uncertain whether our Singapore-based service is subject only to Singapore law or, if it is subject to the application of local laws, whether such local laws would require a payment processor like us to be licensed as a payments service, bank, financial institution, or otherwise. The Payment Services Act (“PS Act”) passedcame into laweffect in Singapore in January 2019 and is expected to come into effect in 2020. Under the PS Act, PayPal Pte. Ltd. will be required to applyhas submitted an application for a Major Payment Institution license to the MAS to continue to provide payments services in Singapore. Furthermore, onceservices. It will continue to operate within a statutory transition period while the PS Act comes into force andapplication is fully implemented,pending. Once PayPal Pte. Ltd. obtains its license, we may face new regulatory costs and challenges, including the following:
In certainthe additional markets outside the U.S. (e.g., Australia),in which we do business, we provide our services to customers through a local subsidiary subject to local regulatory supervision or oversight which may be the holder of a local payment license, certification, or other authorization. In such markets,and we may be subject to significant fines or other enforcement actionactions if we violate applicable reporting, anti-money laundering, capital requirements, privacy, corporate governance, risk management, or any other applicable requirements.
From time to time, we may also acquire entities subject to local payments regulatory supervision or oversight. For example,
There are substantial costs and potential product and operational changes involved in December 2019, we completed our acquisition of a 70% equity stake in Guofubao Information Technology Co. (GoPay), Ltd. (“GoPay”), a provider of online payment services in China. GoPay holds a number of payment business licenses in Chinamaintaining and is subject to regulatory supervision by the People’s Bank of China and other regulatory bodies. We have been, and expect to continue to be, required to apply for variousrenewing licenses, certifications, and regulatory approvals, in a numberand we could be subject to fines, other enforcement actions, and litigation if we are found to violate any of the jurisdictions where we provide our services, including due to changes in applicable laws and regulations or the interpretation of such laws and regulations.these requirements. There can be no assurance that we will be able to (or decide to) continue to apply for or obtain any such licenses, certifications, and approvals. In addition, there are substantial costs and potential product changes involved in maintaining and renewing such licenses,renewals, certifications, and approvals in any jurisdictions. In certain markets, we may rely on local banks or other partners to process payments and weconduct foreign currency exchange transactions in local currency, and local regulators may use their authority over such local partners to prohibit, restrict, or limit us from doing business. The need to obtain or maintain licenses, certifications, or other regulatory approvals could impose substantial additional costs, delay or preclude planned transactions, product launches or improvements, require significant and costly operational changes, impose restrictions, limitations, or additional requirements on our business, products and services, or prevent us from providing our products or services in a given market.
Lending Regulation
PayPal’s U.S. consumer short-term installment loan product is subject to state lending laws (some of which require licensure and/or state regulator notification), state collection laws, as well as compliance with the Equal Credit Opportunity Act and Regulation B as implemented by the Consumer Financial Protection Bureau (“CFPB”) and other applicable laws and regulations. Changes to state laws and regulatory interpretation may require us to make product changes, incur substantial additional costs, or cease lending in a particular state. We could be subject to fines, other enforcement action, and litigation if we are found to violate disclosure, reporting, anti-money laundering, capitalization, corporate governance, or other requirementsany aspects of such licenses. These factors could impose substantial additional costs, involve considerable delay to the development or provision of our products or services, require significant and costly operational changes, or prevent us from providing our products or services in a given market.installment loan regulations.
Consumer Protection
The CFPB issued a final rule on prepaid accounts that came into effect on April 1, 2019. The rule’s definition of prepaid account includes certain accounts that are capable of being loaded with funds and whose primary function is to conduct transactions with multiple, unaffiliated merchants, at ATMs and/or for P2P transfers. That definition includes certain digital wallets. The rule’s requirements include, among other things, the disclosure of fees and other information to the consumer prior to the creation of a prepaid account; the extension of Regulation E liability limits and error-resolution requirements to all prepaid accounts; the application of Regulation Z credit card requirements to prepaid accounts with overdraft and credit features; and the submission of prepaid account agreements to the CFPB and their publication to the general public. We have implemented certain changes to comply with the final rule and made substantial changes to the design of certain U.S. consumer accounts and their operability, which could lead to unintended customer confusion and dissatisfaction, discourage customers from opening new accounts, require us to reallocate resources, and increase our costs, which could negatively affect our business. In December 2019, we filed a lawsuit in the U.S. District Court for the District of Columbia against the CFPB challenging the validity of the prepaid account rule as applied to PayPal, Inc. As with any litigation, there is no guarantee that our claims will succeed.
PayPal principally offers its services in EEAthe European Economic Area (“EEA”) countries through a “passport” notification process through the Luxembourg regulator (in the case of PayPal (Europe)) or the Swedish regulator (in the case of iZettle AB) to regulators in other EEA member states in accordance with EU regulations. Regulators in these countries could notify us of local consumer protection laws that apply to our business, in addition to Luxembourg or Swedish consumer protection laws, and could also seek to persuade the local regulator to order PayPal to conduct its activities in the local country directly or through a branch office. Similarly, as a result of Brexit, the U.K. regulators may impose new or different legal requirements on our U.K. business, or require our activities to be conducted locally in the U.K. through a branch office or directly. These or similar actions by these regulators could increase the cost of, or delay, our plansability to expand our business in EEA countries.Europe.
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Anti-Money Laundering and Counter-Terrorist FinancingFinancing; Economic and Trade Sanctions
Privacy and Protection of UserCustomer Data
Any failure, or perceived failure, by us to comply with our privacy policies as communicated to users in one or more jurisdictionswith privacy and data protection laws could result in proceedings or actions against us by data protection authorities, government entities, or others, including class action privacy litigation in certain jurisdictions.others. Such proceedings or actions could subject us to significant fines, penalties, judgments, and negative publicity which may materially harm our business. The foregoing may require us to change our business practices, and would likely increase the costs and complexity of compliance.compliance, and materially harm our business. In addition, compliance with inconsistent privacy and data protection laws may restrict our ability to provide products and services to our customers. For further information regarding data protection and information security, see “Item 1. Business—Government Regulation”.
PayPal relies on a variety of compliance methods to transfer personal data of EEA individuals to the U.S., including reliance on Binding Corporate Rules (“BCRs”) for internal transfers of certain types of personal data and Standard Contractual Clauses (“SCCs”) as approved by the European Commission for transfers to and from third parties. PayPal must also ensure that third parties processing personal data of PayPal’s EEA customers and/or employees outside of the EEA have compliant transfer mechanisms. In October 2015,July 2020, the European Court of Justice invalidated U.S.-EU Safe Harbor framework clauses that were previously relied upon by some PayPal vendors to lawfully transfer personal data of EU citizens to U.S. companies, and PayPal entered into SCCs with those third parties which had previously relied on the U.S.-EU Safe Harbor framework. In July 2016, the U.S. and EU authorities agreed on a replacement for the Safe Harbor framework known as “Privacy Shield.” Both the Privacy Shield frameworkregime and raised several questions regarding the efficacy of SCCs continue to face legal challenges infocusing on whether data transfers under SCCs are consistent with the European justice system.EU privacy principles. To the extent thatPayPal relies on SCCs, or any third party relies on the Privacy Shield or SCCs are invalidated,regime for the compliant transfer of personal data, PayPal’s ability to process EEA personal data with thirdto such parties outside of the EEA and intra-group with its U.S. affiliates could be jeopardized.
We are subject to regulatory activity and legal proceedings under antitrust and competition laws.
We are subject to scrutiny by various government agencies regarding antitrust and competition laws and regulations in the U.S. and internationally, including in connection with proposed business combinations, acquisitions, and investments. Some jurisdictions also provide private rights of action for competitors or consumers to assert claims of anticompetitive conduct. Other companies and government agencies have in the past and may in the future allege that our actions violate the antitrust or competition laws of the U.S., individual states, other countries, or the EU, or otherwise constitute unfair competition. Some regulators and legislators, particularly those outside of the U.S., may perceive that our products and services are used so broadly that otherwise uncontroversial business practices could be deemed anticompetitive. Any claims or investigations, even if without merit, may be very expensive to defend or respond to, involve negative publicity, and substantial diversion of management time and effort, and could result in reputational harm, significant judgments, fines orand remedial actions against us, or require us to change our business practices, make product or operational changes, or delay or preclude planned transactions, product launches or improvements.
We are regularly subject to patent litigation.general litigation, regulatory actions, and government inquiries.
We are regularly subject to claims, individual and class action lawsuits, government and regulatory investigations, inquiries, actions or requests, and other proceedings alleging violations of laws, rules, and regulations with respect to competition, antitrust, intellectual property, privacy, data protection, information security, anti-money laundering, counter-terrorist financing, sanctions, anti-corruption, consumer protection, fraud, accessibility, securities, tax, labor and employment, commercial
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disputes, services, charitable fundraising, contract disputes, escheatment of unclaimed or abandoned property, product liability, the matters described in “Note 13—Commitments and Contingencies—Litigation and Regulatory Matters—General Matters” to our consolidated financial statements, and other matters. The number and significance of these disputes and inquiries may increase as our business expands in scale, scope, and geographic reach, including through acquisitions of businesses and technology, and our products and services increase in scale and complexity. The legal proceedings are inherently uncertain, expensive and disruptive to our operations, and could result in substantial payments to satisfy judgments, fines, penalties or settlements, negative publicity, substantial diversion of management time and effort, reputational harm, criminal sanctions, orders that prevent us from offering certain products or services, requirements to change our business practices in costly ways, develop non-infringing or otherwise altered products or technologies, pay substantial royalty or licensing fees or delay or preclude planned transactions, product launches or improvements. Determining legal reserves or possible losses from such matters involves judgment and may not reflect the full range of uncertainties and unpredictable outcomes. We may be exposed to losses in excess of the amount recorded, and such amounts could be material. If any of our estimates and assumptions change or prove to have been sued repeatedly for allegedlyincorrect, it could have a material adverse effect on our business, financial position, results of operations, or cash flows.
Third parties may allege that we are infringing their patents and other parties’ patents.intellectual property rights.
We are frequently subject to litigation based on allegations of infringement or other violations of intellectual property rights. At any given time, we are typically a defendant in a number of patent lawsuits. We expect that we will continue to belawsuits and subject to patentintellectual property infringement claims. Intellectual property infringement claims because,against us may result from, among other reasons:
things, our expansion into new business areas, including through acquisitions of businesses and technology, the expansion in scope and complexity of our products and services continue to expand in scope and complexity and to convergetheir convergence with technologies not previously associated with the payments space;
We may be unable to adequately protect or enforce our intellectual property rights, or third parties may allege that we are infringing their intellectual property rights.
The protection of our intellectual property, including our trademarks, patents, copyrights, domain names, trade dress, and trade secrets, is important to the success of our business. We seek to protect our intellectual property rights by relying on applicable laws and regulations in the U.S. and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights when offering or procuring products and services, including confidentiality and invention assignment agreements entered into with our employees and contractors and confidentiality agreements with parties with whom we conduct business.
Effective intellectual property protection may not be available in every countryjurisdiction in which we offer our products and services. We may be required to expend significant time and expense in order to prevent infringement or to enforce our rights.
Although we have generally taken measures to protect our intellectual property rights, there can be no assurance that we will be successful in protecting or enforcing our rights in every jurisdiction, or that our contractual arrangements and other steps that we have taken to protect our intellectual property will prevent or deter third parties from infringing or misappropriating our intellectual property, or deter independent development ofand third parties may independently develop equivalent or superior intellectual property rights. We may be required to expend significant time and expense to prevent infringement and enforce our rights, by others.and we may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. If we are unable to prevent third parties from using or offering technologies that infringe our patent or trade secret rights, the uniqueness and value of our products and services could be adversely affected. If we are unable to prevent third parties from adopting, registering, or using trademarks and trade dress that infringe, dilute, or otherwise violate our trademark rights, the value of our brands could be diminished and our business could be adversely affected. We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to others. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation. Any failure to adequately protect or enforce our intellectual property rights, or significant costs incurred in doing so, could diminish the value of our intangible assets and materially harm our business.
We face substantial and increasingly intense competition worldwide in the technologyglobal payments industry.
The global payments industry is highly competitive, continuously changing, highly innovative, and payments industries increases and the functionality of these products further overlaps, and as we acquire technology through acquisitions or licenses, we may become increasingly subject to intellectual property infringementregulatory scrutiny and oversight. Many areas in which we compete evolve rapidly with innovative and disruptive technologies, shifting user preferences and needs, price sensitivity of merchants and consumers, and frequent introductions of new products and services. Competition also may intensify as new competitors emerge, businesses enter into business combinations and partnerships, and established companies in other claims. Litigation may be necessarysegments expand to determine the validity and scopebecome competitive with various aspects of the patent and other intellectual property rights of others. The ultimate outcome of any allegation is often uncertain and, regardless of the outcome, any such claim, with or without merit, may be time-consuming, result in costly litigation, divert management’s time and attention from our business, and require us to, among other things, redesign or stop providing our products or services, pay substantial amounts to satisfy judgments or settle claims or lawsuits, pay substantial royalty or licensing fees, or satisfy indemnification obligations that we have with certain parties with whom we have commercial relationships. Our failure to obtain necessary license or other rights, or litigation or claims arising out of intellectual property matters, may harm or restrict our business.
We compete with a wide range of businesses. Some of our current and potential competitors are regularly subject to general litigation, regulatory actions,larger operationally and/or financially than we are, have larger customer bases, greater brand recognition, longer operating histories, a dominant or more secure position, broader geographic scope, volume, scale, resources, and government inquiries.
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subject to ongoing interpretation by the courts and government authorities, and the resulting uncertainty in their scope and application increases the risk that we will be subject to private claims and government actions alleging violations.
Changes to payment card networks or bank fees, rules, or practices could harm our business.
To process certain transactions, we must comply with applicable payment card network, bank or other network (collectively, “network”) rules. The rules govern all aspects of a transaction, including fees and other practices. From time to time, the networks have increased the fees and assessments that they charge for transactions that access their networks. Certain of the networks have also imposed special fees or assessments for transactions that are executed through a digital wallet such as the one that PayPal offers. Our payment processors may have the right to pass any increases in fees and assessments on to us as well as increase their own fees for processing. Any increase in interchange fees, special fees, or assessments for transactions that we pay to our payment processors or the networks could make our pricing less competitive, increase our operating costs, and reduce our operating income, which could materially harm our business, financial condition, and results of operations.
In some jurisdictions, government regulations have required the payment card networks to reduce or cap interchange fees. Any changes in interchange fee rates or limitations, or their applicability to PayPal, could adversely affect our competitive position against traditional payment card service providers and the revenue we earn from our branded card programs, require us to change our business practices and harm our business.
We may also be subject to fines assessed by the networks resulting from any rule violations by us or our merchants. The networks set and interpret their rules and have alleged from time to time that various aspects of our business model violate these operating rules. Such allegations may result in significant fines and penalties or require changes in our business practices that may be costly and adversely affect our business. The network rules may also increase the cost of, impose restrictions on, or otherwise impact the development of, our retail point-of-sale solutions, which may negatively affect their deployment and adoption. The networks could adopt new operating rules or interpret or re-interpret existing rules that we or our payment processors might find difficult or even impossible to follow, or costly to implement, which could require us to make significant changes to our products. If we become unable or limited in our ability to accept certain payment types such as debit or credit cards, our business would be adversely affected.
Changes in how consumers fund their PayPal transactions could harm our business.
We pay transaction fees when consumers fund payment transactions using credit cards, lower fees when consumers fund payments with debit cards, and nominal fees when consumers fund payment transactions by electronic transfer of funds from bank accounts, from an existing PayPal account balance or Venmo account balance, or through our PayPal branded consumer credit products. Our financial performance is sensitive to changes in the rate at which our consumers fund payments using payment cards, which can significantly increase our costs. Although we provide consumers in certain markets with the opportunity to use their existing PayPal account balance or Venmo account balance to fund payment transactions, some of our consumers may prefer to use payment cards, which may offer features and benefits not provided as part of their PayPal accounts. An increase in the portion of our payment volume funded using payment cards or in any given case. Legislative, administrative,fees associated with our funding mix, or other events or developments that make it more difficult or costly for us to fund transactions with lower-cost funding options, could materially and adversely affect our financial performance and significantly harm our business.
Our ability to receive the benefit of our merchant lending offerings may be subject to challenge.
Merchant loans and advances under our U.S. PayPal Working Capital (“PPWC”) and PayPal Business Loan (“PPBL”) products are provided by a state chartered industrial bank under a program agreement with us, and we acquire the receivables generated by those loans after origination. In June 2020, largely in response to the Madden v. Midland Funding, LLC case decided in the U.S. Court of Appeals for the Second Circuit, the Federal Deposit Insurance Corporation (“FDIC”) approved a final rule clarifying that loans originated by state-chartered banks remain valid throughout the lifetime of the loan, reflecting a similar rule finalized by the Office of the Comptroller of Currency (“OCC”) in May 2020. The final rule reaffirms and codifies in regulation the so-called “valid-when-made doctrine,” which provides that the interest rate for a loan is determined when the
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loan is made and will not be affected by subsequent events such as sale, assignment, or other transfer. A number of state attorneys general have challenged these FDIC and OCC rules, and there remains some uncertainty whether non-bank entities purchasing loan receivables originated by FDIC-insured, state chartered industrial banks, may rely on federal preemption of state usury laws and other state laws. An adverse outcome of these or similar challenges, or changes to applicable laws and regulations, could materially impact our U.S. PPWC and PPBL products and our business.
Our credit products expose us to additional risks.
We offer credit products to a wide range of consumers and merchants in the U.S. and various international markets. The financial success of these products depends on the effective management of related risk. The credit decision-making process for our consumer credit products uses proprietary methodologies and credit algorithms and other analytical techniques designed to analyze the credit risk of specific consumers based on, among other factors, their past purchase and transaction history with PayPal or Venmo and their credit scores. Similarly, proprietary risk models and other indicators are applied to assess merchants who desire to use our merchant lending offerings to help predict their ability to repay. These risk models may not accurately predict the creditworthiness of a consumer or merchant due to inaccurate assumptions, including those related to the particular consumer or merchant, market conditions, economic environment, or limited transaction history or other data. The accuracy of these risk models and the ability to manage credit risk related to our credit products may also be affected by legal or regulatory developmentsrequirements, changes in consumer behavior, changes in the economic environment, issuing bank policies, and other factors.
We generally rely on third-party chartered financial institutions to provide PayPal and Venmo branded consumer credit and merchant lending offerings to our U.S. customers. As a service provider to these third-party chartered financial institutions, which are federally supervised U.S. financial institutions, we are subject from time to time to examination by their federal banking regulators. In the event of any termination or interruption in a partner bank’s ability or willingness to lend, our ability to offer consumer credit and merchant credit products could be interrupted or limited, which could materially and adversely affect our business. We may directlybe unable to reach a similar arrangement with another chartered financial institution on favorable terms or indirectly prohibit or limit the use of pre-dispute arbitration clausesat all. Obtaining licenses to originate such loans would be a costly, time-consuming and class action waiver provisions. Any such prohibitions or limitations on or discontinuation of the use of, such arbitration or class action waiver provisions coulduncertain process, and would subject us to additional lawsuits, including additional consumer class action litigation,laws and regulatory requirements, which could significantly limitincrease our abilitycosts and compliance obligations and require us to avoid exposure from consumer class action litigation.
We are subject to the risk that account holders who use our credit products will default on their payment obligations, creating the risk of potential charge-offs or negatively impacting our revenue share arrangement with Synchrony Bank. The non-payment rate among account holders may increase due to, among other factors, changes to underwriting standards, risk models not accurately predicting the creditworthiness of a user, worsening economic conditions, such as a recession or government austerity programs, increases in prevailing interest rates, and high unemployment rates. Account holders who miss payments often fail to repay their loans, and account holders who file for protection under the bankruptcy laws generally do not repay their loans.
We currently purchase receivables related to our merchant lending offerings in the U.S. and extend credit for our consumer and merchants products outside the U.S. through our international subsidiaries. If we are unable to fund our credit business adequately or in a cost-effective manner, or if we are unable to efficiently manage the cash flow,resources utilized for these purposes, the growth of our credit business could be negatively impacted.
We rely on third parties in many aspects of our business, which creates additional risk.
We rely on third parties in many aspects of our business, including: networks, banks, payment processors, and payment gateways that link us to the payment card and bank clearing networks to process transactions; unaffiliated third-party lenders to originate our U.S. PayPal Credit, U.S. merchant credit, and branded credit card products; our branded debit card products; cryptocurrency custodial service providers; and external business partners and contractors who provide key functions (e.g., outsourced customer support and product development functions; facilities; information technology, data center facilities and cloud computing). These risks may include legal, regulatory, information security, reputational, operational, or any other risks inherent in engaging a third party. If we are unable to effectively manage our third-party relationships, these third parties are unable to meet their obligations to us, or we experience substantial disruptions in these relationships, our operations, results of operations, and financial conditions.results could be adversely impacted. Additionally, while we have policies and procedures for managing these relationships, they inherently involve a lesser degree of control over business operations, governance, and compliance, thereby potentially increasing our financial, legal, reputational, and operational risk.
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Any factors that reduce cross-border trade or make such trade more difficult could harm our business.
Cross-border trade (i.e., transactions where the merchant and consumer are in different countries) is an important source of our revenues and profits. Cross-border transactions generally provide higher revenues and operating income than similar transactions that take place within a single country or market. In December 2017,certain markets, cross-border trade represents our primary (and in some instances our only) presence.
Cross-border trade may be negatively impacted by various factors including foreign currency exchange rate fluctuations and the U.S. government enacted comprehensive Federal tax legislation commonly referredinterpretation and application of laws of multiple jurisdictions in the context of cross-border trade and foreign exchange. Any factors that increase the costs of cross-border trade for us or our customers or that restrict, delay, or make cross-border trade more difficult or impractical, such as trade policy or higher tariffs, could reduce our cross-border transactions and volume, negatively impact our revenues and profits, and harm our business.
Failure to as the Tax Cutsdeal effectively with fraud, fictitious transactions, bad transactions, and Jobs Act of 2017 (the “Tax Act”). The Tax Act made changes to the corporate taxnegative customer experiences would increase our loss rate business-related deductions, and taxation of foreign earnings, among others, that are generally effective for taxable years beginning after December 31, 2017. Throughout 2018 and 2019, the U.S. Treasury and certain states issued proposed and final legislation and clarifying guidance with respect to the various provisions of the Tax Act. Additional legislation and guidance is expected to be issued in 2020 and could have a material adversenegatively impact on the value of our U.S. deferred tax assets, result in significant changes to currently computed income tax liabilities for past and current tax periods, and increase our future U.S. tax expense. The implementation by us of new practices and processes designed to comply with, and benefit from, the Tax Act and its rules and regulations could require us to make substantial changes to our business practices, allocate additional resources, and increase our costs, which could negatively affect our business, results of operations, and financial condition.
Our buyer and liabilities,seller protection programs protect merchants and consumers from fraudulent transactions, and protect consumers if they do not receive the item ordered or if the item received is significantly different from its description. We incur substantial losses from our buyer and seller protection programs as a result of gains onclaims from consumers. We seek to recover losses from our foreign currency exchange risk management program;buyer and seller protection programs from the merchant, but may not fully recover them if the merchant is unwilling or changes in tax laws, regulations,unable to pay or accounting principles, as well as certain discrete items.
Use of our payments services for illegal purposes could harm our business.
Our payment system is susceptible to potentially illegal or improper uses, including money laundering, terrorist financing, sanctions evasion, illegal online gambling, fraudulent sales of goods or services, illegal sales of prescription medications or controlled substances, piracy of software, movies, music, and other copyrighted or trademarked goods (in particular, digital goods), bank fraud, child pornography, human trafficking, prohibited sales of alcoholic beverages or tobacco products, securities fraud, pyramid or ponzi schemes, or the facilitation of other illegal or improper activity. The use of our payment system for illegal or improper uses has subjected us, and may subject us in the future, to comply with theseclaims, individual and similar reportingclass action lawsuits, and record-keeping obligationsgovernment and regulatory requests, inquiries, or investigations that could result in substantial monetary penalties and other sanctions, adversely impact our ability to do business in certain jurisdictions,liability and harm our reputation. Moreover, certain activity that may be legal in one jurisdiction may be illegal in another jurisdiction, and a merchant may be found responsible for intentionally or inadvertently importing or exporting illegal goods, resulting in liability for us. Owners of intellectual property rights or government authorities may seek to bring legal action against providers of payments solutions, including PayPal, that are peripherally involved in the sale of infringing or allegedly infringing items. Any threatened or resulting claims could result in reputational harm, and any resulting liabilities, loss of transaction volume, or increased costs could harm our business.
Acquisitions, joint ventures, strategic investments, and other strategic transactions could result in operating difficulties and could harm our business.
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transactions”). At any given time, we may be engaged in discussions or negotiations with respect to one or more strategic transactions, any of which could, individually or in the aggregate, be material to our financial condition and results of operations. There can be no assurance that we will be successful in identifying, negotiating, and consummating favorable transaction opportunities. ItStrategic transactions may take us longer than expectedinvolve additional significant challenges, uncertainties, and risks, including, but not limited to, fully realizechallenges of integrating new employees, systems, technologies, and business cultures; failure to develop the acquired business adequately; disruption of our ongoing operations and diversion of our management’s attention; inadequate data security, cybersecurity and operational and information technology resilience; failure to identify, or our underestimation of, commitments, liabilities, deficiencies and other risks associated with acquired businesses or assets; and potential exposure to new or increased regulatory oversight and uncertain or evolving legal, regulatory, and compliance requirements; potential reputational risks that could arise from transactions with, or investments in, companies involved in new or developing businesses or industries, which may be subject to uncertain or evolving legal, regulatory, and compliance requirements; failure of the transaction to advance our business strategy and of its anticipated benefits to materialize; potential impairment of goodwill or other acquisition-related intangible assets; and synergiesthe potential for our acquisitions to result in dilutive issuances of theseour equity securities or significant additional debt. Strategic transactions and those benefits and synergies may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results. Because acquisitionsalso heighten many of the risks described in this “Risk Factors” section. These transactions are inherently risky, our transactions may not be successful, and may in some cases, harm our operating results or financial condition. Any acquisitions, dispositions, or investments may also require us to issue additional equity securities, spend our cash, or incur debt (and increased interest expense), recognize liabilities, and record gains or losses (realized or unrealized) and amortization expenses related to intangible assets or write-offs of goodwill or intangibles, which could dilute the economic and voting rights of our stockholders and adversely affect ourbusiness, results of operations, and the interests of holders of our indebtedness, as applicable.financial condition.
Our international operations subject us to increased risks, which could harm our business.
Our international operations generate approximately one-half of our net revenues. Our international operations, including any expansion in international markets, subject us to significant challenges, uncertainties, and risks, including, but not limited to: local regulatory, licensing, reporting, and legal obligations; costs and challenges associated with operating in markets in which we may have limited or no experience, including effectively localizing our products and services and adapting them to local preferences; difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences and in light of varying laws, regulations, and customs; difficulties in recruiting and retaining qualified company employees and maintaining our company culture; fluctuations in foreign currency exchange rates; exchange control regulations; profit repatriation restrictions; potential tariffs, sanctions, fines, or other trade barriers or restrictions; import or export regulations; compliance with U.S. and foreign anti-corruption, anti-bribery, sanctions, anti-money laundering and counter-terrorist financing laws and regulations; the interpretation and application of laws of multiple jurisdictions; and national or regional political, economic, or social instability.
Our international operations also may heighten many of the other risks described in this “Risk Factors” section. Violations of the complex foreign and U.S. laws, rules and regulations that may apply to our international operations may result in fines, criminal actions, or sanctions against us, our officers, or our employees; prohibit or require us to change the way we conduct our business; and damage our reputation. Although we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees, contractors, or agents will not violate our policies. These risks are inherent in our international operations, may increase our costs of doing business internationally, and could materially and adversely affect our business.
Brexit: The United Kingdom’s departure from the EU could harm our business, financial condition, and results of operations.
Following the departure of the U.K. from the EU and the EEA on January 31, 2020 (commonly referred to as “Brexit”) and the expiration of a transition period on December 31, 2020, there continues to be uncertainty over the practical consequences of Brexit including the potential for Brexit to contribute to long-term instability in financial, stock and currency exchange markets, greater restrictions on the supply and availability of goods and services between the U.K. and EEA region, and a general deterioration in consumer sentiment and credit conditions leading to overall negative economic growth and increased risk of merchant default.
The consequences of Brexit have brought legal uncertainty and increased complexity for financial services firms, which could continue as national laws and regulations in the U.K. differ from EU laws and regulations and additional authorization requirements come into effect. These developments have led to additional regulatory costs and challenges for us, including:
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•PayPal (Europe) operates in the U.K. within the scope of its passport permissions (as they stood at the end of the transition period) pursuant to the Temporary Permissions Regime pending the grant of new UK authorizations by the U.K. financial regulators. If we are unable to obtain the required authorizations before the expiry of the longstop dates set by the U.K. regulators under the Temporary Permissions Regime, our European operations could lose their ability to offer services into the U.K. market on a cross-border basis; and
•our European operations are required to comply with new legal and regulatory requirements in the U.K. that occasionally are in addition to, or inconsistent with, those of the EEA, in each case, leading to increased complexity and costs.
Global and regional economic conditions could harm our business.
Adverse global and regional economic conditions such as turmoil affecting the banking system or financial markets, including tightening in the credit markets, extreme volatility or distress in the financial markets (including the fixed income, credit, currency, equity, and commodity markets), higher unemployment, high consumer debt levels, reduced consumer confidence or economic activity, government fiscal and tax policies, U.S and international trade relationships, agreements, treaties, tariffs and restrictive actions, the inability of a government to enact a budget in a fiscal year, government shutdowns, government austerity programs, and other negative financial news or macroeconomic developments could have a material adverse impact on the demand for our products and services, including a reduction in the volume and size of transactions on our Payments Platform. Additionally, any inability to access the capital markets when needed due to volatility or illiquidity in the markets and increased regulatory liquidity and capital requirements may strain our liquidity position. Such conditions may also expose us to fluctuations in foreign currency exchange rates or interest rates that could materially and adversely affect our financial results. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Impact of Foreign Currency Exchange Rates and Liquidity and Capital Resources” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for additional information on our financial risks.
If one or more of our counterparty financial institutions default on their financial or performance obligations to us or fail, we may incur significant losses.
We have significant amounts of cash, cash equivalents, receivables outstanding, and other investments on deposit or in accounts with banks or other financial institutions in the U.S. and international jurisdictions. As part of our currency hedging activities, we enter into transactions involving derivative financial instruments with various financial institutions. Certain banks and financial institutions are also lenders under our credit facilities. We regularly monitor our exposure to counterparty credit risk, and actively manage this exposure to mitigate the associated risk. Despite these efforts, we may be exposed to the risk of default by, or deteriorating operating results or financial condition or failure of, these counterparty financial institutions. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or to access or recover our assets that are deposited, held in accounts with, or otherwise due from, such counterparty may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition.
There are risks associated with our indebtedness.
We have incurred indebtedness, and we may incur additional indebtedness in the future. Our outstanding indebtedness and any additional indebtedness we incur may have significant consequences, including, without limitation, the following:
reducing our indebtedness and leverage may increase our vulnerabilityflexibility in planning for or reacting to downturnschanges in our business, to competitivecompetition pressures and to adverse changes in general economicmarket conditions; and industry conditions;
limiting our ability to obtain additional financing for working capital, capital expenditures, acquisitions, share repurchases, or other general corporate and other purposes may be limited; andpurposes.
Our revolving credit facilities and the indenture for our senior unsecured notes pursuant to which certain of our outstanding debt securities were issued contain financial and other covenants that restrict or could restrict, among other things, our business and operations. If we fail to pay amounts due under a debt instrument or breach any of its covenants, the lenders would typically have the right to demand immediate repayment of all borrowings thereunder (subject in certain cases to a grace or cure period). Moreover, any such acceleration and required repayment of, or default in respect of, our indebtedness could, in turn, constitute an event of default under other debt instruments, thereby resulting in the acceleration and required repayment of our indebtedness. Any of these events could materially adversely affect our liquidity and financial condition.
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Changes by any rating agency to our outlook or credit rating could negatively affect the value of both our debt and equity securities and increase our borrowing costs. If our credit ratings are downgraded or other negative action is taken, the interest rates payable by us under our indebtedness may increase. In addition, any downgrades to our credit ratings may affectincrease, and our ability to obtain additional financing in the future and the terms of any such financing. Any of these factors could adversely affect our financial condition and results of operations.
Changes in tax laws, exposure to unanticipated additional tax liabilities, or refuseimplementation of record-keeping obligations could have a material adverse effect on our business.
An increasing number of U.S. states, the U.S. federal government, and foreign jurisdictions, as well as international organizations, such as the Organization for Economic Co-operation and Development and the EU Commission, are focused on tax reform and other legislative or regulatory action to process transactionsincrease tax revenue. Various countries have proposed or provide otherenacted digital services adequately, taketaxes. These actions that degrade the functionalitymay materially affect our effective tax rate.
The determination of our services, impose additional costsworldwide provision for income taxes and other tax liabilities requires estimation and significant judgment, and there are many transactions and calculations where the ultimate tax determination is uncertain. We are currently undergoing a number of investigations, audits, and reviews by tax authorities in multiple U.S. and foreign tax jurisdictions. Any adverse outcome of any such audit or requirementsreview could result in unforeseen tax-related liabilities that differ from the amounts recorded in our financial statements, which may, individually or in the aggregate, materially affect our financial results in the periods for which such determination is made. While we have established reserves based on usassumptions and estimates that we believe are reasonable to cover such eventualities, these reserves may prove to be insufficient.
In addition, our future income taxes could be adversely affected by the incurrence of losses or earnings being lower than anticipated in jurisdictions that have lower statutory tax rates, and earnings being higher than anticipated in jurisdictions that have higher statutory tax rates; by changes in the valuation of our customers, or give preferential treatment to competitive services. There can be no assurance that third parties who provide services directly to us or our customersdeferred tax assets and liabilities, including as a result of gains on our behalfforeign currency exchange risk management program; by changes in tax laws, regulations, or accounting principles; or by certain discrete items.
A number of U.S. states, the U.S. federal government, and foreign jurisdictions have implemented and may impose reporting or record-keeping obligations on companies that engage in or facilitate e-commerce to improve tax compliance. A number of jurisdictions are also reviewing whether payment service providers and other intermediaries could be deemed to be the legal agent of merchants for certain tax purposes. We have modified our systems to meet applicable requirements and expect that further modifications will continuebe required to comply with future requirements, which may negatively impact our customer experience and increase operational costs. Any failure by us to comply with these and similar reporting and record-keeping obligations could result in substantial monetary penalties and other sanctions, adversely impact our ability to do so on acceptable terms, or at all. If any third parties do not adequately or appropriately provide their services or perform their responsibilities to us or our customers on our behalf, we may be unable to procure alternatives from other third partiesbusiness in a timelycertain jurisdictions, and efficient manner and on acceptable terms, or at all, and we may be subject to business disruptions, losses or costs to remediate any of the deficiencies, customer dissatisfaction, reputational damage, legal or regulatory proceedings, or other adverse consequences which could harm our business.
On July 17, 2015, we became an independent publicly traded company through the pro rata distribution by eBay Inc. of 100% of our outstanding common stock to eBay’s stockholders (which we sometimes refer to as the “separation” or the “distribution”). eBay received an opinion from its outside legal counsel regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code. The opinion was based on and relied on, among other things, certain facts and assumptions, as well as certain representations, statements, and undertakings of eBay and of us, including those relating to the past and future conduct of eBay and of us. If any of these representations, statements, or undertakings were, or became, inaccurate or incomplete, or if eBay or we breach any of our respective covenants in the separation documents, the opinion of counsel may be invalid, and the conclusions reached therein could be jeopardized.
Notwithstanding the opinion of counsel, the Internal Revenue Service (the “IRS”) could determine that the distribution, together with certain related transactions, should be treated as a taxable transaction if the IRS determines that any of these representations, assumptions, or undertakings upon which such opinion was based are incorrect or have been violated or if the IRS disagrees with the conclusions in the opinion of counsel. An opinion of counsel is not binding on the IRS or any court and there can be no assurance that the IRS will not challenge the conclusions reached in the opinion. The IRS did not provide any opinion in advance of the separation that our proposed transaction is tax-free.
If the distribution, together with certain related transactions, failed to qualify as a transaction that is generally tax-free, under Sections 368(a)(1)(D) and 355 of the Code, in general, eBay would recognize taxable gain as if it had sold the PayPal common stock in a taxable sale for its fair market value, eBay stockholders who received PayPal common stock in the distribution may be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares, and we could incur significant liabilities.
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There are risks associated with our relationship with eBay.
In connection with our separation from eBay, we entered into a separation and distribution agreement with eBay as well asand various other agreements, including an operating agreement aand agreements covering tax, matters agreement, an employee, matters agreement, anand intellectual property matters, agreement, a data sharing, addendum, and a product development agreement. The separation agreement, the tax matters agreement, the employee matters agreement, and the intellectual property matters agreementdevelopment. These agreements determined the allocation of assets and liabilities (including by means of licensing) between the companies following the separation for those respective areas and include associated indemnification obligations. The operating agreement, the data sharing addendum,obligations and the product development agreement establishestablished certain commercial relationships between eBay and us related to payment processing, credit, and data sharing.us. If either we or eBay are unable to satisfy our performance, payment, or indemnification obligations under these agreements or other commercial agreements between the parties, we could incur operational difficulties or losses or be required to make substantial indemnification or other payments to eBay.
We are subject to risks associated with information disseminated through our products and services.
We may be subject to claims relating to information disseminated through our online services, including claims alleging defamation, libel, harassment, hate speech, breach of contract, invasion of privacy, negligence, copyright or trademark infringement, or other theories based on the nature and content of the materials disseminated through the services, among other things. If the laws or regulations that provide protections for online dissemination of information are invalidated or are modified to reduce protections available to us orand we become liable for information provided by our stockholders, any action asserting a claim against us or any ofcustomers and carried on our directors or officers arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”) or our amendedproducts and restated certificate of incorporation or bylaws, or any action asserting a claim against us or any of our directors or officers governed by the internal affairs doctrine. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuits against us and our directors and officers. Alternatively, if a court outside of Delaware were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above,services, we could incur additional costs associated with resolving such matters in other jurisdictions,be directly harmed and we may be forced to implement new measures to reduce our exposure, including expending substantial resources or discontinuing certain product or service offerings, which could adversely affectharm our business, financial condition, or results of operations.business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own and lease various properties in the U.S. and other countries around the world. We use the properties for executive and administrative offices, data centers, product development offices, and customer services and operations centers. As of December 31, 2019,2020, our owned and leased properties provided us with aggregate square footage as follows:
| United States | Other Countries | Total | United States | Other Countries | Total | ||||||||||||||||||||
| (In millions) | (In millions) | ||||||||||||||||||||||||
| Owned facilities | 1.2 | 0.2 | 1.4 | Owned facilities | 1.0 | 0.2 | 1.2 | ||||||||||||||||||
| Leased facilities | 1.2 | 1.8 | 3.0 | Leased facilities | 1.4 | 2.0 | 3.4 | ||||||||||||||||||
| Total facilities | 2.4 | 2.0 | 4.4 | Total facilities | 2.4 | 2.2 | 4.6 | ||||||||||||||||||
We own a total of approximately 113106 acres of land, with approximately 9285 acres in the U.S. Our corporate headquarters are located in San Jose, California and occupy approximately 0.7 million of owned square feet.
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ITEM 3. LEGAL PROCEEDINGS
The information set forth under “Note 13—Commitments and Contingencies—Litigation and Regulatory Matters” to the consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PayPal common stock is quoted on the NASDAQ Global Select Market under the ticker symbol “PYPL.”
As of January 31, 2020,29, 2021, there were 3,5533,926 holders of record of our common stock. The actual number of stockholders is significantly greater than this number of record holders, and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
We have never paid any cash dividends and we currently do not anticipate paying any cash dividends in the foreseeable future.
The stock repurchase activity under our stock repurchase programsprogram during the three months ended December 31, 20192020 is summarized as follows:
| Total number of shares purchased | Average price paid per share(1) | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs | ||||||||||
| (In millions, except per share amounts) | |||||||||||||
| October 1, 2019 through October 31, 2019 | — | $ | — | — | $ | 10,374 | |||||||
| November 1, 2019 through November 30, 2019 | — | $ | — | — | 10,374 | ||||||||
| December 1, 2019 through December 31, 2019 | 2.9 | $ | 105.21 | 2.9 | 10,068 | ||||||||
| 2.9 | 2.9 | $ | 10,068 | ||||||||||
| Total number of shares purchased | Average price paid per share(1) | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs | ||||||||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | 8,698 | |||||||||||||||||||||||||||
| October 1, 2020 through October 31, 2020 | 0.6 | $ | 198.39 | 0.6 | 8,586 | ||||||||||||||||||||||||
| November 1, 2020 through November 30, 2020 | 0.5 | $ | 188.64 | 0.5 | 8,488 | ||||||||||||||||||||||||
| December 1, 2020 through December 31, 2020 | 0.2 | $ | 224.55 | 0.2 | 8,433 | ||||||||||||||||||||||||
| Balance as of December 31, 2020 | 1.3 | 1.3 | $ | 8,433 | |||||||||||||||||||||||||
(1) Average price paid per share for open market purchases includes broker commissions.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data reflect the consolidated operations of PayPal. PayPal derived the selected consolidated income statement data for the years ended December 31, 2020, 2019, 2018, and 20172018 and the selected consolidated balance sheet data as of December 31, 20192020 and 20182019 as set forth below, from its audited consolidated financial statements, which are included in “Item 15. Exhibits, Financial Statement Schedules” of this Annual Report on Form 10-K.10-K (“Form 10-K”). PayPal derived the selected consolidated income statement data for the years ended December 31, 20162017 and 20152016 and selected consolidated balance sheet data as of December 31, 2018, 2017, 2016, and 20152016 from audited consolidated financial statements not included in this Annual Report on Form 10-K. The historical results do not necessarily indicate the results expected for any future period. To ensure a full understanding, youYou should read the selected consolidated financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes included elsewhere in this report.
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||||||||||||
| Consolidated Statement of Income Data: | |||||||||||||||||||||||||||||
| Net revenues | $ | 21,454 | $ | 17,772 | $ | 15,451 | $ | 13,094 | $ | 10,842 | |||||||||||||||||||
| Operating income | 3,289 | 2,719 | 2,194 | 2,127 | 1,586 | ||||||||||||||||||||||||
| Net income | 4,202 | 2,459 | 2,057 | 1,795 | 1,401 | ||||||||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||||||||
| Basic | $ | 3.58 | $ | 2.09 | $ | 1.74 | $ | 1.49 | $ | 1.16 | |||||||||||||||||||
| Diluted | $ | 3.54 | $ | 2.07 | $ | 1.71 | $ | 1.47 | $ | 1.15 | |||||||||||||||||||
| Weighted average shares: | |||||||||||||||||||||||||||||
| Basic | 1,173 | 1,174 | 1,184 | 1,203 | 1,210 | ||||||||||||||||||||||||
| Diluted | 1,187 | 1,188 | 1,203 | 1,221 | 1,218 | ||||||||||||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||||||||||||
| Total assets | $ | 70,379 | $ | 51,333 | $ | 43,332 | $ | 40,774 | $ | 33,103 | |||||||||||||||||||
| Total long-term liabilities | 11,869 | 7,485 | 2,042 | 1,917 | 1,513 | ||||||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||||
| Consolidated Statement of Income Data: | |||||||||||||||||||
| Net revenues | $ | 17,772 | $ | 15,451 | $ | 13,094 | $ | 10,842 | $ | 9,248 | |||||||||
| Operating income | 2,719 | 2,194 | 2,127 | 1,586 | 1,461 | ||||||||||||||
| Net income | 2,459 | 2,057 | 1,795 | 1,401 | 1,228 | ||||||||||||||
| Net income per share: | |||||||||||||||||||
| Basic | $ | 2.09 | $ | 1.74 | $ | 1.49 | $ | 1.16 | $ | 1.00 | |||||||||
| Diluted | $ | 2.07 | $ | 1.71 | $ | 1.47 | $ | 1.15 | $ | 1.00 | |||||||||
Weighted average shares(1): | |||||||||||||||||||
| Basic | 1,174 | 1,184 | 1,203 | 1,210 | 1,222 | ||||||||||||||
| Diluted | 1,188 | 1,203 | 1,221 | 1,218 | 1,229 | ||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||
| Total assets | $ | 51,333 | $ | 43,332 | $ | 40,774 | $ | 33,103 | $ | 28,881 | |||||||||
| Total long-term liabilities | 7,485 | 2,042 | 1,917 | 1,513 | 1,505 | ||||||||||||||
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ITEM 7. 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, 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. These forward-looking statements involve risks and uncertainties that could cause our actual results and financial condition to differ materially from those expressed or implied in our forward-looking statements. 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”). 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”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 2019 results as compared to 2018 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—“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Form 8-K10-K for the year ended December 31, 2019 filed with the SEC on September 16, 2019.February 6, 2020.
THE COMPANY
We are a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumersmerchants and merchantsconsumers worldwide. PayPal is committed to democratizing financial services to improve the financial health of individuals and empowering peopleto increase economic opportunity for entrepreneurs and businesses to join and thrive inof all sizes around the global economy.world. Our goal is to enable our consumersmerchants and merchantsconsumers to manage and move their money anywhere in the world, anytime, on any platform, and using any device.device when sending payments or getting paid. We also facilitate person-to-person (“P2P”) payments through our PayPal, Venmo, and Xoom products.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 iZettleHyperwallet products and services, comprise our proprietary Payments Platform.
Regulatory Environment
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus by regulators globally 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 asindustry, including 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 theThe 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 lawschanges to their interpretation and regulations are interpreted and implemented,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. Therefore, weWe monitor these areas closely to designand are focused on designing compliant solutions for our customers who depend on us.customers.
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Information Security
Information security risks for global payments and technology companies like us have increased significantly increased in recent years. We are not immuneAlthough 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 weour security measures will not suffer such losses in the future.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.”
COVID-19
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.
BREXIT
The United Kingdom (“U.K.”) held a referendum in June 2016 in which a majority of voters approved an exit fromformally exited the European Union (“EU”), commonly referred to as “Brexit.” The U.K. formally exited and the EUEuropean Economic Area (“EEA”) on January 31, 2020 and(commonly referred to as “Brexit”) with the expiration of a transition period is in place untilon December 31, 2020 during which time2020. PayPal (Europe) S.à.r.l. et Cie, SCA (“PayPal (Europe)”) operates in the U.K. will remain in bothwithin the EU customs union and single market and follow EU rules. There is a significant lackscope of clarity overits passport permissions (as they stood at the termsend of the U.K.’s future relationship withtransition period) under the EU after that date.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, as any impactwhich will depend, in part, on the outcomeimplications of new tariff, trade and regulatory frameworks that now govern the provision of cross-border goods and other negotiations.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. market. For additional information on how Brexit could affect our business, see “Item 1A. Risk Factors—Brexit: The United Kingdom’s departure from the EU could adversely affect usharm our business, financial condition, and results of operations.”
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Brexit could adversely affect U.K., regional (including European), and worldwide economic and market conditions, and couldmay contribute to instability in global 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.
In 2020, 2019, 2018, and 2017,2018, net revenues generated from our U.K. operations constituted 11% of total net revenues. In 2020, 2019, 2018, and 2017,2018, net revenues generated from the EU (excluding the U.K.) constituted less than 20% of total net revenues. Approximately 37%50% and 31%37% of our gross loans and interest receivables as of December 31, 20192020 and 2018,2019, respectively, were generateddue from ourcustomers in the U.K. operations. Approximately 6%14% and 7%6% of our gross loans and interest receivables as of December 31, 20192020 and 2018,2019, respectively, were generateddue 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.
The following table provides a summary of our consolidated financial results for the years ended December 31, 2020, 2019, 2018, and 2017:2018:
| Year Ended December 31, | Percent Increase/(Decrease) | Year Ended December 31, | Percent Increase/(Decrease) | |||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| (In millions, except percentages and per share amounts) | (In millions, except percentages and per share amounts) | |||||||||||||||||||||||||||||||||||||||||||||
| Net revenues | $ | 17,772 | $ | 15,451 | $ | 13,094 | 15 | % | 18 | % | Net revenues | $ | 21,454 | $ | 17,772 | $ | 15,451 | 21 | % | 15 | % | |||||||||||||||||||||||||
| Operating expenses | 15,053 | 13,257 | 10,967 | 14 | % | 21 | % | Operating expenses | 18,165 | 15,053 | 13,257 | 21 | % | 14 | % | |||||||||||||||||||||||||||||||
| Operating income | 2,719 | 2,194 | 2,127 | 24 | % | 3 | % | Operating income | 3,289 | 2,719 | 2,194 | 21 | % | 24 | % | |||||||||||||||||||||||||||||||
| Operating margin | 15 | % | 14 | % | 16 | % | ** | ** | Operating margin | 15 | % | 15 | % | 14 | % | ** | ** | |||||||||||||||||||||||||||||
| Other income (expense), net | 279 | 182 | 73 | 53 | % | 149 | % | Other income (expense), net | 1,776 | 279 | 182 | 537 | % | 53 | % | |||||||||||||||||||||||||||||||
| Income tax expense | 539 | 319 | 405 | 69 | % | (21 | )% | Income tax expense | 863 | 539 | 319 | 60 | % | 69 | % | |||||||||||||||||||||||||||||||
| Effective tax rate | 18 | % | 13 | % | 18 | % | ** | ** | Effective tax rate | 17 | % | 18 | % | 13 | % | ** | ** | |||||||||||||||||||||||||||||
| Net income | $ | 2,459 | $ | 2,057 | $ | 1,795 | 20 | % | 15 | % | Net income | $ | 4,202 | $ | 2,459 | $ | 2,057 | 71 | % | 20 | % | |||||||||||||||||||||||||
| Net income per diluted share | $ | 2.07 | $ | 1.71 | $ | 1.47 | 21 | % | 16 | % | Net income per diluted share | $ | 3.54 | $ | 2.07 | $ | 1.71 | 71 | % | 21 | % | |||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 4,561 | $ | 5,483 | $ | 2,531 | (17 | )% | 117 | % | ||||||||||||||||||||||||||||||||||||
Net cash provided by operating activities(1) | 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. As a result, certain amounts may not recalculate using the rounded amounts provided.
** Not Meaningful
(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 $2.3$3.7 billion, or 15%21%, in 20192020 as compared to 2018,2019 driven primarily by growth in TPV (astotal payment volume (“TPV”, as defined below under “Net Revenues”) of 23%31%. Net revenues from our acquisitions completed in 2018Our acquisition of Honey Science Corporation (“Honey”) 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 2019.2020.
Total operating expenses increased $1.8$3.1 billion, or 14%21%, in 20192020 as compared to 2018,2019 due primarily to an increase in transaction expense, and to a lesser extent, increases in technology and development customer supportexpenses, sales and operations,marketing expenses, transaction and credit losses, and general and administrative expenses, partially offset byexpenses. Our acquisitions of Honey and a decline70% equity interest in restructuring and other charges. Operating expenses related to our acquisitions completed in 2018Guofubao Information Technology Co. (GoPay), Ltd. (“GoPay”) collectively contributed approximately threefive percentage points to the growth rate in total operating expenses in 2019.2020.
Operating income increased $525$570 million, or 24%21%, in 20192020 as compared to 2018. Acquisitions completed2019 due to growth in 2018net 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 fivethree 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.which was offset by operating efficiencies.
Net income increased by $402 million,$1.7 billion, or 20%71%, in 20192020 as compared to 2018,2019 due to anthe previously discussed increase in operating income of $525$570 million and an increase in other income (expense), net of $97 million,$1.5 billion, driven primarily by net unrealized gains on strategic investments, partially offset by an increase in income tax expense of $220 million.$324 million, driven primarily by tax expense related to gains on strategic investments.
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IMPACT OF FOREIGN CURRENCY EXCHANGE RATES
We have significant international operations that are denominated in foreign currencies, primarily the British Pound, Euro, Australian Dollar, and Canadian Dollar, subjecting us to foreign currency exchange risk which may adversely impact our financial results. The strengthening or weakening of the U.S. dollar versus the British Pound, Euro, Australian Dollar, and Canadian Dollar, as well as other currencies in which we conduct our international operations, impacts the translation of our net revenues and expenses generated in these foreign currencies into the U.S. dollar. In 2020, 2019, 2018, and 2017,2018, we generated approximately 47%49%, 46%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, including those discussed under “Item 1A. Risk Factors—Risk Factors That May Affect Our Business, Results of Operations, and Financial Condition.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 wherebyin 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.
In the years ended December 31, 20192020 and 2018,2019, the year-over-year foreign currency movements relative to the U.S. dollar had the following impact on our reported results:
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (In millions) | |||||||
| (Unfavorable) favorable impact to net revenues (exclusive of hedging impact) | $ | (316 | ) | $ | 123 | ||
| Hedging impact | 238 | (23 | ) | ||||
| (Unfavorable) favorable impact to net revenues | (78 | ) | 100 | ||||
| Favorable (unfavorable) impact to operating expense | 158 | (18 | ) | ||||
| Net favorable impact to operating income | $ | 80 | $ | 82 | |||
| Year Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In millions) | |||||||||||
| Favorable (unfavorable) impact to net revenues (exclusive of hedging impact) | $ | 66 | $ | (316) | |||||||
| Hedging impact | 20 | 238 | |||||||||
| 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 useused 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 wherebyin 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. These foreign currency exchange contracts reduce, but do not entirely eliminate, the impact of foreign currency exchange rate movements on our assets and liabilities.
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NET REVENUES
Our revenues are classified into the following two categories:
•Transaction revenues: 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. 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. •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:
•The mix of merchants, products, and services;
•The mix between domestic and cross-border transactions;
•The geographic region or country in which a transaction occurs; and
•The amount of our loans receivable outstanding with merchants and consumers.
| Year Ended December 31, | Percent Increase/ (Decrease) | ||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | |||||||||||||
| (In millions, except percentages) | |||||||||||||||||
| Transaction revenues | $ | 16,099 | $ | 13,709 | $ | 11,501 | 17 | % | 19 | % | |||||||
| Other value added services | 1,673 | 1,742 | 1,593 | (4 | )% | 9 | % | ||||||||||
| Net revenues | $ | 17,772 | $ | 15,451 | $ | 13,094 | 15 | % | 18 | % | |||||||
| Year Ended December 31, | Percent Increase/ (Decrease) | ||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | |||||||||||||
| (In millions, except percentages and payment transactions per active account) | |||||||||||||||||
Active accounts(1) | 305 | 267 | 229 | 14 | % | 17 | % | ||||||||||
Number of payment transactions(2) | 12,361 | 9,871 | 7,769 | 25 | % | 27 | % | ||||||||||
Payment transactions per active account(3) | 40.6 | 36.9 | 34.0 | 10 | % | 9 | % | ||||||||||
TPV(4) | $ | 711,925 | $ | 578,419 | $ | 456,179 | 23 | % | 27 | % | |||||||
| Percent of cross-border TPV | 18 | % | 19 | % | 21 | % | ** | ** | |||||||||
•Anactive accountis 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 accountreflects the total number of payment transactions within the previous 12 month12-month period, divided by active accounts at the end of the period. 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.
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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/ (Decrease) | ||||||||||||||||||||||||||||
| 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
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Transaction revenues grew more slowly than both TPV, which grew 31%, and the number of payment transactions, which grew 25%, in 20192020 compared to 20182019 due primarily to a higher proportion of P2P transactions (primarily from our Venmo and PayPal 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 proportion of cross border transactions, partially offset by foreign currency exchange hedging gains.rates with higher transaction volumes. Changes in prices charged to our customers did not significantly impact transaction revenue growth in 2019.2020.
The total gross consumer and merchant loans receivable balance including loans and receivable held for sale, as of December 31, 2020 and 2019 2018, and 2017 was $4.2 billion, $2.7$3.6 billion and $7.8$4.2 billion, respectively. The year-over-year increasedecrease of 56%15% in 20192020 compared to 2018,2019 was driven by an increasea decline in both 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 international consumerinterest 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 portfolios. The year-over-year decreasemodifications in certain cases. These measures have adversely impacted and are expected to continue to adversely impact the recognition of 66%interest and fee income in 2018 compared to 2017, was driven byfuture periods. Given the completionuncertainty 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 saleextent of U.S. consumer credit receivables portfolio.
these types of actions and their prospective impact on our interest and fee income is not determinable. In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolioaddition, consumers that have outstanding loans and interest receivable due to Synchrony to free up balance sheet capacity and cash flow for other uses and mitigate balance sheet risk. Following the closing of this transactionmay experience similar hardships that result 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 ownedincreased losses recognized by Synchrony, which is recordedmay result in net revenuesa decrease in our revenue share earned from other value added services.
OPERATING EXPENSES
The following table summarizes our operating expenses and related metrics we use to assess the trends in each:
| Year Ended December 31, | Percent Increase/ (Decrease) | ||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | |||||||||||||
| (In millions, except percentages) | |||||||||||||||||
| Transaction expense | $ | 6,790 | $ | 5,581 | $ | 4,419 | 22 | % | 26 | % | |||||||
| Transaction and loan losses | 1,380 | 1,274 | 1,011 | 8 | % | 26 | % | ||||||||||
Customer support and operations(1) | 1,615 | 1,407 | 1,265 | 15 | % | 11 | % | ||||||||||
Sales and marketing(1) | 1,401 | 1,314 | 1,142 | 7 | % | 15 | % | ||||||||||
Technology and development(1) | 2,085 | 1,831 | 1,740 | 14 | % | 5 | % | ||||||||||
General and administrative(1) | 1,711 | 1,541 | 1,258 | 11 | % | 22 | % | ||||||||||
| Restructuring and other charges | 71 | 309 | 132 | (77 | )% | 134 | % | ||||||||||
| Total operating expenses | $ | 15,053 | $ | 13,257 | $ | 10,967 | 14 | % | 21 | % | |||||||
Transaction expense rate(2) | 0.95 | % | 0.96 | % | 0.97 | % | |||||||||||
Transaction and loan loss rate(3) | 0.19 | % | 0.22 | % | 0.22 | % | |||||||||||
| Year Ended December 31, | Percent Increase/ (Decrease) | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||||||||
| Transaction expense | $ | 7,934 | $ | 6,790 | $ | 5,581 | 17 | % | 22 | % | |||||||||||||||||||
| Transaction and credit losses | 1,741 | 1,380 | 1,274 | 26 | % | 8 | % | ||||||||||||||||||||||
| Customer support and operations | 1,778 | 1,615 | 1,407 | 10 | % | 15 | % | ||||||||||||||||||||||
| Sales and marketing | 1,861 | 1,401 | 1,314 | 33 | % | 7 | % | ||||||||||||||||||||||
| Technology and development | 2,642 | 2,085 | 1,831 | 27 | % | 14 | % | ||||||||||||||||||||||
| General and administrative | 2,070 | 1,711 | 1,541 | 21 | % | 11 | % | ||||||||||||||||||||||
| Restructuring and other charges | 139 | 71 | 309 | 96 | % | (77) | % | ||||||||||||||||||||||
| Total operating expenses | $ | 18,165 | $ | 15,053 | $ | 13,257 | 21 | % | 14 | % | |||||||||||||||||||
Transaction expense rate(1) | 0.85 | % | 0.95 | % | 0.96 | % | ** | ** | |||||||||||||||||||||
Transaction and credit loss rate(2) | 0.19 | % | 0.19 | % | 0.22 | % | ** | ** | |||||||||||||||||||||
** Not meaningful.
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Transaction expense
Transaction expense is primarily composed of the costs we incur to accept a customer’s funding source of payment. These costs include fees paid to payment processors and other financial institutions to draw funds from a customer’s credit or debit card, bank account, or other funding source they have stored in their digital wallet. 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, aor 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. The cost of funding a transaction is also impacted by the geographic region or country in which a transaction occurs because we generally pay lower rates for transactions funded with credit cards outside the U.S. than in the U.S. 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 $1.2$1.1 billion, or 22%17%, in 20192020 compared to 2018,2019 and was primarily attributable to an increase in TPV of 23%31%. 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 20192020 compared to 20182019 was due primarily to favorable changes in product mix and funding mix. For the years ended December 31, 2020, 2019, 2018, and 2017,2018, approximately 2% of TPV was funded with PayPal Credit. For the years ended December 31, 2020, 2019, and 2018, and 2017, approximately 41%40%, 43%41%, and 43% of TPV, respectively, was generated outside of the U.S.
Transaction and loancredit losses
Transaction losses include the expense associated with our buyer and seller protection programs, fraud, and chargebacks. LoanCredit losses include the losses associated with our merchant and consumer loans receivable portfolio, except loans and interest receivable, held for sale.portfolio. Beginning in 2020, these losses are based on current expected credit losses. Our transaction and loancredit 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.
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The components of our transaction and loancredit losses (in millions) for the years ended December 31, 2020, 2019, 2018, and 20172018 were as follows:
| Year Ended December 31, | Percent Increase/(Decrease) | ||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | |||||||||||||
| (In millions, except percentages) | |||||||||||||||||
| Transaction losses | $ | 1,092 | $ | 1,059 | $ | 823 | 3 | % | 29 | % | |||||||
| Loan losses | 288 | 215 | 188 | 34 | % | 14 | % | ||||||||||
| Transaction and loan losses | $ | 1,380 | $ | 1,274 | $ | 1,011 | 8 | % | 26 | % | |||||||
Transaction loss rate(1) | 0.15 | % | 0.18 | % | 0.18 | % | |||||||||||
Transaction loss rate is calculated(transaction losses divided by dividing transaction losses by TPV.TPV) was 0.12%, 0.15%, and 0.18% for the years ended December 31, 2020, 2019, and 2018, respectively.
Transaction losses increased by $33$43 million, or 3%4%, in 20192020 compared to 2018,2019 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. 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.
The consumer loans receivableand interest receivables balance as of December 31, 2020 and 2019 was $2.2 billion and 2018 was $1.3 billion, and $704 million, respectively. The year-over-year increase of 88%64% in 20192020 compared to 20182019 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 94%77% and 93%94% of our consumer loans receivables outstanding as of December 31, 20192020 and 2018,2019, respectively, were due from consumers in the U.K.
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The following table provides information regarding the credit quality of our consumer loans and interest receivable balance:
| December 31, | |||||
| 2019 | 2018 | ||||
| Percent of consumer loans and interest receivables current | 93.9 | % | 94.9 | % | |
Percent of consumer loans and interest receivables > 90 days outstanding(1) | 2.2 | % | 1.7 | % | |
Net charge off rate(2) | 4.1 | % | 3.1 | % | |
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
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) | 0.9 | % | 1.5 | % | |||||||
Net charge off rate(4) | 2.4 | % | 4.1 | % | |||||||
(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.
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 business financing solutionsaccess to credit products for certain small and medium-sized merchants.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 and 2018 were $2.8$1.4 billion and $1.9$2.8 billion, respectively. The year-over-year increasedecrease of 50%51% in 20192020 compared to 20182019 was due primarily to growtha reduction in originations due to modifications in our PayPalacceptable 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 Loan portfolioAdministration (“SBA”) and an increaseenacted in March 2020 under the availability of our PayPal Working Capital product.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 83%81% and 10% of our merchant receivables outstanding as of December 31, 20192020 were due from merchants in the U.S. and U.K., as compared to 87%83% and 10% as of December 31, 2018,2019, respectively.
The following table provides information regarding the credit quality of our merchant loans, advances, and interest and fees receivable balance:
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| 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) | 12.5 | % | 4.2 | % | |||||||
Net charge off rate (2) | 18.9 | % | 7.4 | % | |||||||
(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.
| December 31, | |||||
| 2019 | 2018(1) | ||||
| Merchant loans and advances | |||||
| Percent of merchant receivables within original expected or contractual repayment period | 89.6 | % | 91.0 | % | |
| Percent of merchant receivables > 90 days outstanding after the end of original expected or contractual repayment period | 4.2 | % | 3.7 | % | |
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Customer support and operations
Customer support and operations includes (a) costs incurred in our global customer operations centers, including costs to provide call support to our customers, (b) costs to support our trust and security programs protecting our merchants and consumers, and (c) other costs incurred related to the delivery of our products, including payment devices, card production, and customer onboarding and compliance costs.
Customer support and operations costs increased $208$163 million, or 15%10%, in 20192020 compared to 2018.2019. The increase in 20192020 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 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.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$460 million, or 7%33%, in 20192020 compared to 2018,2019 due primarily to increases in employee-related expenses, amortization of acquired intangibles, and consulting services, partially offset by lowerhigher spend on marketing programs.programs and employee-related expenses. Our acquisitions completed in 2018of Honey and GoPay collectively contributed approximately eight20 percentage points to the growth rate of sales and marketing expenses in 2019, primarily due to amortization2020.
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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$557 million, or 14%27%, in 20192020 compared to 2018,2019 due primarily to increases in employee-related expenses, and to a lesser extent inamortization of acquired intangibles, 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 2018of Honey and GoPay collectively contributed approximately four15 percentage points to the growth rate of technology and development expenses in 2019.2020.
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$359 million, or 11%21%, in 20192020 compared to 2018,2019 due primarily to increases in employee-related expenses, andprofessional services expenses, including those attributable to a lesser extent in facilities costs, and depreciationacquisition related transaction expenses, and amortization associated with systemsof acquired intangibles and toolsinternally developed software 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 2018of Honey and GoPay collectively contributed approximately four13 percentage points to the growth rate of general and administrative expenses in 2019.2020.
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Restructuring and other charges
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 decreasedincreased by $238$68 million in 20192020 compared to 2018, due primarily to2019.
During the salefirst quarter of our U.S. consumer credit receivables portfolio in July 2018, prior to2020, management approved a strategic reduction of the existing global workforce, 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 increaseresulted in restructuring charges of $53 million$109 million. The approved strategic reduction in 20192020 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 comparedwell 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 2018. be completed by the end of the first quarter of 2021.
Additionally, in 2019,2020, we recorded a gainincurred asset impairment charges of $7$30 million representing an adjustmentdue to the loss from additional expenses incurred associatedwrite-off of certain right-of-use lease assets and related leasehold improvements in conjunction with the sale of our U.S. consumer credit portfolio to Synchrony.exiting certain leased properties.
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.million. 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 terminatedended 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 primarily incurred primarily employee and severance benefits expenses under both the 2019 and 2018 strategic reductions, which were substantially completed by the end of 2019the first quarter of 2020.
For information on the associated restructuring liability, see “Note 17—Restructuring and 2018, respectively.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,$1.5 billion, or 53%537%, in 20192020 compared to 2018,2019 primarily driven by net unrealized gains on strategic investments of $1.7 billion due primarily 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.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 the long term debtour fixed rate notes issued in the third quarter of 2019.2019 and second quarter of 2020.
Income tax expense
Our effective tax rate was 17% in 2020 and 18% in 2019 and 13% in 2018.2019. The increasedecrease in our effective tax rate in 20192020 was primarily the result of favorable discrete tax adjustments, partially offset by taxes associated with the intra-group transfer of intellectual property related to the acquisition of iZettle.gains on strategic investments. 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.
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LIQUIDITY AND CAPITAL RESOURCES
We require liquidity and access to capital to fund our global operations, including customer protection programs, our credit products, capital expenditures, investments in our business, potential acquisitions and strategic investments, working capital, and other cash needs. The following table summarizes our cash, cash equivalents, and investments as of December 31, 20192020 and 2018:2019:
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| (In millions) | |||||||
Cash, cash equivalents, and investments(1)(2) | $ | 11,722 | $ | 9,710 | |||
| Year Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (In millions) | |||||||||||
Cash, cash equivalents, and investments(1)(2) | $ | 15,852 | $ | 11,722 | |||||||
(1) Excludes assets related to funds receivable and customer accounts of $22.5$33.4 billion and $20.1$22.5 billion as of December 31, 20192020 and 2018,2019, respectively.
(2) Excludes total restricted cash of $64$88 million and $77$64 million at December 31, 20192020 and 2018,2019, respectively, and strategic investments of $1.83.2 billion and $293 million$1.8 billion as of December 31, 20192020 and 2018,2019, respectively.
Foreign Cash, Cash Equivalents, and Investments
Cash, cash equivalents, and investments held by our foreign subsidiaries were $7.0 billion at December 31, 2020 and $7.2 billion as ofat December 31, 2019, or 44% 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. At December 31, 2019,2020, 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.transition tax. Subsequent repatriations to the U.S. will not be taxable from a U.S. federal tax perspective, but may be subject to state or foreign withholding tax. A significant aspect of our global cash management activities involves meeting our customers’ requirements to access their cash while simultaneously meeting our regulatory financial ratio commitments in various jurisdictions. Our global cash balances are required not only to provide operational liquidity to our businesses, but also to support our global regulatory requirements across our regulated subsidiaries. As such, not all of our cash is available for general corporate purposes.
Available Credit and Debt
We also maintain committed andan uncommitted credit facilities in various regions throughout the world,facility with a borrowing capacity of approximately $230$30 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.
For additional information, see “Note 12—Debt” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We have a cash pooling arrangementsarrangement with a financial institution for cash management purposes. EachThe arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the financial institution (“Aggregate Cash Deposits”). EachThe 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 eachthe arrangement. As of December 31, 2019,2020, we had a total of $3.5$3.9 billion in cash withdrawals offsetting our $3.5$3.9 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangements.arrangement.
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Liquidity for Credit Portfolio GrowthLoans Receivable
Growth in theour portfolio of loan receivables increases our liquidity needs, and any failureinability to meet those liquidity needs could adversely affect our business. We continue to evaluate partnerships and third party sources of funding for our creditloans 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, 2019,2020, the cumulative amount approved by management to be designated for credit activities aggregated to $2.0 billion and represented approximately 31%21% of European customer balances potentially available for our corporate use by us 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. Our objective is to expand the availability of our credit products with capital from external sources, although there can be no assurance that we will be successful in achieving that goal. 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, 2019,2020, we continue to be rated investment grade by Standard and Poor’s Financial Services, LLC, and 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 loansborrowings under our credit agreements.agreement.
Risk of Loss
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. For the periods presented in these consolidated financial statements included in this report, our transaction loss rates ranged between 0.15%0.12% and 0.18% of TPV. 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, 2019,2020, we repurchased approximately $1.4$1.6 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 programprograms authorized in April 2017.2017 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, 2019,2020, a total of approximately $68 million and $10$8.4 billion remained available for future repurchases of our common stock under our April 2017 and July 2018 stock repurchase programs, respectively.program. 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 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.
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Other Considerations
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.
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.factors, including those related to the COVID-19 pandemic discussed in this Form 10-K. 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”Factors” 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 facingthat our business.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 sharestock repurchase programs,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) | |||||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
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 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 4,561 | $ | 5,483 | $ | 2,531 | |||||
| Investing activities | (5,733 | ) | 840 | (4,485 | ) | ||||||
| Financing activities | 3,688 | (1,262 | ) | 4,084 | |||||||
| Effect of exchange rates on cash, cash equivalents, and restricted cash | (6 | ) | (113 | ) | 36 | ||||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 2,510 | $ | 4,948 | $ | 2,166 | |||||
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 loancredit 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 loancredit losses are estimates of probable incurredcurrent expected credit losses on our consumermerchant and merchant credit products (excluding the U.S. consumer credit portfolio from and after November 2017).products. Actual charge-offs of receivables related to our consumermerchants and merchantconsumer credit products (excluding the U.S. consumer credit portfolio from and after November 2017) have no impact on cash from operating activities.
We generated cash from operating activities of $4.6$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.
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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, andincluded provision for transaction and loancredit losses wereof $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 $207 million in 2019.$208 million. 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 of $1.1 billion, an increase in other assets of $566 million and accounts receivable of $120 million, partially offset by an increase in funds payable and amounts due to customers, and an increase in accounts receivableother liabilities of $120$722 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. consumer credit receivables portfolio. AdjustmentsDuring 2018, 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 theincluded provision for transaction and loancredit losses were approximatelyof $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 wereof $244 million during 2018.million. The cash generated from operating activities was negativelyalso impacted by changes in other assets and liabilities, of $708 million, primarily related to actual cash transaction losses incurred during the period.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 and 2017 was $565 million, $665 million, $328 million, and $117$328 million, respectively.
Investing Activities
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 $342$351 million. These cash outflows were partially offset by maturities and sales of investments of $24.9 billion.
We generated cash from investing activities of $840$821 million in 2018 due primarily to maturities and sales of investments of $21.9 billion, changes in principal loans receivable, net of $3.1 billion, and changes in funds receivable from customers of $1.1 billion. These cash inflows were offset by purchases of investments of $22.4 billion, acquisitions of $2.1 billion (net of cash and restricted cash acquired), and purchases of property and equipment of $823 million.
Financing Activities
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$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 our Amended Credit Agreement,a previous credit agreement, and changes in funds payable and amounts due to customers of $2.5$3.0 billion. These cash inflows were partially offset by repayment of borrowings under our Amended Credit Agreementa 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.
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The net cash used in financing activities of $1.3$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 positive impact of $169 million, a negative effectimpact 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 $6 million and $113 million, respectively.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. dollar against certain foreign currencies, primarily the Australian dollar and to a lesser extent, the Euro.
As of December 31, 20192020 and 2018,2019, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.
As of December 31, 2019,2020, approximately $3.1$3.0 billion of unused credit was available to PayPal Credit account holders compared to $1.8$3.1 billion of unused credit as of December 31, 2018.2019. 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. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination based on, among other things, account usage and customer creditworthiness.
We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes. Changes in our business needs, contractual cancellation provisions, fluctuating interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of these payments. The following table summarizes our obligations as of December 31, 20192020 that are expected to impact liquidity and cash flow in future periods. 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.
| Purchase 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 | ||||||||||||||||||||
Purchase Obligations | Operating Leases | Transition Tax | Long-term Debt | Total | |||||||||||||||
| Payments Due During the Year Ending December 31, | (In millions) | ||||||||||||||||||
| 2020 | $ | 256 | $ | 137 | $ | 114 | $ | 129 | $ | 636 | |||||||||
| 2021 | 60 | 138 | 114 | 128 | 440 | ||||||||||||||
| 2022 | 18 | 106 | 114 | 1,128 | 1,366 | ||||||||||||||
| 2023 | 2 | 88 | 212 | 106 | 408 | ||||||||||||||
| 2024 | 2 | 81 | 284 | 1,356 | 1,723 | ||||||||||||||
| Thereafter | 14 | 224 | 354 | 3,030 | 3,622 | ||||||||||||||
| $ | 352 | $ | 774 | $ | 1,192 | $ | 5,877 | $ | 8,195 | ||||||||||
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), 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.
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•Transition Taxtax 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.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$1.4 billion of such non-current liabilities included in deferred and other tax liabilities recorded on our consolidated balance sheetssheet as of December 31, 2019.2020.
The Company does not experience meaningful seasonality with respect to net revenues. No individual quarter in 2020, 2019, 2018, or 20172018 accounted for more than 30% of annual net revenue.
The application of U.S. GAAP requires us to make estimates and assumptions about certain items and future events that directly affect our reported financial condition. We have established detailed policies and control procedures to provide reasonable assurance that the methods used to make estimates and assumptions are well controlled and are applied consistently from period to period. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to our financial statements. An accounting estimate is considered critical if both (a) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (b) the impact within a reasonable range of outcomes of the estimate and assumption is material to our financial condition. 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 available to reasonably available, can be reliably estimated,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 CREDIT LOSSES
Transaction and loan losses
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 goods or services, ACH returns,purchased items, buyer protection program claims, account takeovers, and account overdrafts.Automated Clearing House returns. Additions to the allowance, in the form of provisions, are reflected in transaction and loancredit 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 paymentcollection and write-off patterns, and the mix of transaction and loss types.types, as well as current and projected macroeconomic factors, as appropriate.
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We also establish an allowance for loans and interest receivable, which represents our estimate of probable incurred loancurrent expected credit losses inherent in our merchantportfolio of loans and advances and consumer loansinterest receivable. Increases to the allowance for loans receivable are reflected as transaction and loan losses on our consolidated financial statements. This evaluation process is subject to numerous estimates and judgments. For our consumer loan receivables, consisting primarily of our international consumer receivables, theThe allowance is primarily based on forecasted principal balance delinquency rates (“roll rates”). Roll rates are the percentageexpectations of balances which we estimate will migrate from one stage of delinquency to the nextcredit losses based on our historical experience,lifetime loss data as well as externalmacroeconomic forecasts applied to the portfolio, which is segmented by factors such as estimated bankruptciesgeographic region, delinquency, and levelsvintage. Loss curves are generated using historical loss data for each loan portfolio and are applied to segments of unemployment. Rolleach 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 loanand 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 for each stage of delinquency, from current to 180 days pastare primarily revolving in nature and do not have a contractual term; however, the payment due date, to estimate the principal loans whichreasonable and supportable forecast period we have incurred losses and are probable to be charged off. For merchant loans and advances the allowance is primarilyincluded in our projected loss rates based on principal balances, forecasted delinquencyexternally 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 and recoveries throughis approximately 2.5 to 3.5 years, depending upon the use of a vintage-based loss forecasting model.
product. The allowance for loss against thecredit losses on interest and fees receivable is determined primarily by applying historical average customer account roll ratesloss curves to the interest receivable balance in each stageportfolio by geography, delinquency, and period 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 inorigination, among other current liabilities on our consolidated balance sheets.factors.
Determining appropriate current expected credit loss allowances for these lossesloans 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 current expected credit losses incurred at the balance sheet date. Based ondate 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. and U.K. 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 resultsallowances. Our allowance as of December 31, 2020 has been adjusted to account for the year endedproactive 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, 2019, an aggregate ten percent2020 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 transaction and loan loss rate would negatively impact transaction and loan lossesallowances by approximately $138 million.$36 million based on the loans and interest receivable balance outstanding as of December 31, 2020.
Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions quarterly and adjust the balances as new information becomes available. Our income tax rate is significantly affected by the tax rates that apply to our foreign earnings. 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. Indefinite reinvestment is determined by management’s judgment about, and intentions concerning, our future operations.
Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These sources of income rely heavily on estimates that are based on a number of factors, including our historical experience and short-range and long-range business forecasts. To the extent deferred tax assets are not expected to be realized, we record a valuation allowance.
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We recognize and measure uncertain tax positions in accordance with U.S. GAAP, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. U.S. GAAP further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter in which such change occurs. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited by the relevant tax authorities and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes are adequate such that we reflect the benefits more likely than not to be sustained in an examination. We adjust these reserves, as well as the related interest and penalties, where appropriate in light of changing facts and circumstances. Settlement of any particular position could require the use of cash.
Based on our results for the year ended December 31, 2019,2020, a one-percentage point increase in our effective tax rate would have resulted in an increase in our income tax expense of approximately $30$51 million.
We are currently involved in various claims, regulatory and legal proceedings, and investigations of potential operating violations by regulatory oversight authorities. We regularly review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim, legal proceeding, or potential regulatory violation is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and whether an exposure is reasonably estimable. 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 bediffer materially different thanfrom the actual outcomes.
Application of the accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment. Further, we provide incentive payments to consumers and merchants, which require judgment to determine whether the payments should be recorded as a reduction to gross revenue. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.
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 andor 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. Our estimates are based upon assumptions that we believe to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which do not reflect unanticipated events and circumstances that may occur.
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We evaluate goodwill and intangible assets for impairment on an annual basis, or sooner if indicators of impairment exist. Under U.S. 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 for evaluating goodwill for impairment. In performing these qualitative assessments, we consider relevant events and conditions, including but not limited to: macroeconomic trends, industry and market conditions, overall financial performance, cost factors, company-specific events, legal and regulatory factors, and our market capitalization. If the qualitative assessments indicate that it is more likely than not that the fair value of the reporting unit or indefinite-lived intangible assets are less than their carrying amounts, we must perform a quantitative impairment test.
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 iscould 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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in market factors such as interest rates, foreign currency exchange rates, and equity investment risk. Management establishes and oversees the implementation of policies governing our investing, funding, and foreign currency derivative activities in order to mitigate market risks. We monitor risk exposures on an ongoing basis.
We are exposed to interest rate risk relating to our investment portfolio and from interest-rate sensitive assets underlying the customer balances we hold on our consolidated balance sheets as customer accounts.
As of December 31, 2020 and 2019, approximately 30% and 2018, approximately 63% and 78%, respectively, of our total cash, cash equivalents, and investment portfolio (excluding restricted cash and strategic investments) was held in cash and cash equivalents. The assets underlying the customer balances which we hold on our consolidated balance sheets as customer accounts are maintained in interest and non-interest bearing bank deposits, time deposits, U.S. and foreign government and agency securities, and corporate debt securities, and asset-backed securities. We seek to preserve principal while holding eligible liquid assets, as defined by applicable regulatory requirements and commercial law in certain jurisdictions where we operate, equal to at least 100% of the aggregate amount of all customer balances. We do not pay interest on amounts due to customers.
If interest rates increased by 100 basis points, the fair value of our available-for-sale debt securities investment portfolio would decrease by approximately $173 million and $68 million at December 31, 2020 and 2019, respectively.
We have $5.0$9.0 billion in fixed rate debt with varying maturity dates. Since these notes bear interest at fixed rates, they do not result in any financial statement risk associated with changes in interest rates. However, the fair value of these notes fluctuates when interest rates change. We also have variousa committed revolving credit facilitiesfacility of $5.0 billion available to us aggregating to approximately $6.1 billion.us. We are obligated to pay interest on loansborrowings under these facilitiesthis facility as well as other customary fees, including an upfront fee and an unused commitment fee based on our debt rating. Borrowings under these facilities,this facility, if any, bear interest at floating rates. As a result, we are exposed to the risk related to fluctuations in interest rate to the extent of our borrowings. As of December 31, 2020 and 2019, we had no amounts outstanding under thesethis credit facilities. As of December 31, 2018, we had $2.0 billion of borrowings outstanding at a weighted average interest rate of 3.34%.facility. For additional information, see “Note 12—Debt” in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K10-K.
Interest rates may also adversely impact our customers’ spending levels and ability and willingness to pay outstanding amounts owed to us. Higher interest rates often lead to higherlarger payment obligations by customers of our credit products to us, or to lenders under mortgage, credit card, and other consumer and merchant loans, which may reduce our customers’ ability to remain current on their obligations to us and therefore lead to increased delinquencies, charge-offs, and allowances for loans and interest receivable, which could have an adverse effect on our net income.
We have significant operations internationally that are denominated in foreign currencies, primarily the British Pound, Euro, Australian Dollar, and Canadian Dollar, subjecting us to foreign currency exchange rate risk, which may adversely impact our financial results. We transact business in various foreign currencies and have significant international revenues and costs. In addition, we charge our international subsidiaries for their use of intellectual property and technology and for certain corporate services. Our cash flows, results of operations, and certain of our intercompany balances that are exposed to foreign currency exchange rate fluctuations may differ materially from expectations, and we may record significant gains or losses due to foreign currency fluctuations and related hedging activities. We are generally a net receiver of foreign currencies and therefore benefit from a weakening of the U.S. dollar, and are adversely affected by a strengthening of the U.S. dollar, relative to foreign currencies.
We have a foreign currency exchange exposure management program designed to identify material foreign currency exposures, manage these exposures, and reduce the potential effects of currency fluctuations on our reported consolidated cash flows and results of operations through the execution of foreign currency exchange contracts. These foreign currency exchange contracts are accounted for as derivative instruments. For additional details related to our foreign currency exchange contracts, please see “Note 10—Derivative Instruments” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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We use foreign currency exchange forward contracts to protect our forecasted U.S. dollar-equivalent earnings and our investment in a foreign subsidiary from adverse changes in foreign currency exchange rates. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse foreign currency exchange rate movements. We designate these contracts as cash flow and net investment hedges for accounting purposes. The derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (“AOCI”). Cash flow hedges are subsequently reclassified into the financial statement line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. The accumulated gains and losses associated with the net investment hedge will remain in AOCI until the foreign subsidiary is sold or substantially liquidated, at which point they will be reclassified into earnings.
We considered the historical trends in foreign currency exchange rates and determined that it was reasonably possible that changes in exchange rates of 20% for all currencies could be experienced in the near term. If the U.S. dollar weakened by 20% at December 31, 20192020 and 2018,2019, the amount recorded in AOCI related to our foreign currency exchange forward contracts, before taxes, would have been approximately $900 million$1.1 billion and $707$900 million lower, respectively. If the U.S. dollar strengthened by 20% at December 31, 20192020 and 2018,2019, the amount recorded in AOCI related to our foreign currency exchange forward contracts, before taxes, would have been approximately $900 million$1.1 billion and $707$900 million higher, respectively.
We have an additional foreign currency exchange management program wherebyin which we use foreign currency exchange contracts to offset the foreign currency exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of 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.
Adverse changes in exchange rates of 20% for all currencies would have resulted in an adverse impact on income before income taxes of approximately $147$353 million and $295$147 million at December 31, 20192020 and 2018,2019, respectively, without considering the offsetting effect of hedging.foreign currency exchange contracts. Foreign currency exchange contracts in place as of December 31, 2020 would have positively impacted income before income taxes by approximately $369 million, resulting in a net positive impact of approximately $16 million. Foreign currency exchange contracts in place as of December 31, 2019 would have positively impacted income before income taxes by approximately $153 million, resulting in a net positive impact of approximately $6 million. Foreign currency exchange contracts in place as of December 31, 2018 would have positively impacted income before income taxes by approximately $308 million, resulting in a net positive impact of approximately $13 million. These reasonably possible adverse changes in exchange rates of 20% were applied to total monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries at the balance sheet dates to compute the adverse impact these changes would have had on our income before income taxes in the near term.
Our strategic investments are subject to a variety of market-related risks that could substantially reduce or increase the carrying value of the portfolio. As of December 31, 20192020 and 2018,2019, our strategic investments totaled $1.8$3.2 billion and $293 million,$1.8 billion, respectively, which represented approximately 13%17% and 3%13% of our total cash, cash equivalents, and investment portfolio at each of those respective dates. Our strategic investments include marketable equity securities, which are publicly traded, and non-marketable equity securities, which are investments in privately held companies that are not publicly traded. We are required to record all adjustments to the carrying value of these strategic investments through our consolidated statements of income. As such, we anticipate volatility to our net income in future periods due to changes in fair value related to our investments in marketable equity securities and changes in observable prices related to our non-marketable equity securities accounted for under the Measurement Alternative. These changes could be material based on market conditions. A hypothetical adverse change of 10% in the carrying value of our strategic investments, of 10%, which could be experienced in the near term, would resulthave resulted in a decrease of approximately $184$323 million to the carrying value of the portfolio.portfolio as of December 31, 2020. We review our non-marketable equity investments accounted for under the Measurement Alternative for impairment when events and circumstances indicate a decline in fair value of such assets below carrying value. Our analysis includes a review of recent operating results and trends, recent purchases and sales of securities, and other publicly available data.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements covering the years ended December 31, 2020, 2019, 2018, and 20172018 and accompanying notes listed in Part IV, Item 15(a)(1) of this Annual Report on Form 10‑K are included elsewhere in this report.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), our principal executive officer and our principal financial officer have concluded that as of December 31, 2019,2020, the end of the period covered by this report, our disclosure controls and procedures were effective.
Management’s report on internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2019.2020.
The effectiveness of our internal control over financial reporting as of December 31, 20192020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Item 15(a) of this Annual Report on Form 10-K.
Changes in internal controls over financial reporting. There were no changes in our internal controls over financial reporting as defined in Exchange Act Rule 13a-15(f) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference from our Proxy Statement for our 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2019.2020.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from our Proxy Statement for our 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2019.2020.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from our Proxy Statement for our 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 20192020.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from our Proxy Statement for our 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 20192020.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference from our Proxy Statement for our 20202021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2019.2020.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
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| All other schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. | |||||
| The information required by this Item is set forth in the Index of Exhibits that precedes the signature page of this Annual Report. | |||||
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of PayPal Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of PayPal Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 20192020 and 2018,2019, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019,2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 20192020 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company'sCompany’s internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses on financial instruments in 2020 and the manner in which it accounts for leases as of January 1,in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s report on internal control over financial reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company'sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Income TaxesLoans Receivable
As described in Notes 1 and 1611 to the consolidated financial statements, the Company's accounting for income taxes requires the reportingas of liabilities for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken on tax returns. Significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertain tax positions related to complex tax laws which may be subject to different interpretations by the taxpayer and respective government taxing authorities. The Company’s effective income tax rate for the year ended December 31, 20192020, the Company recorded total loans and interest receivable of $2,769 million, net of an allowance for current expected credit losses of $838 million. The allowance for loans receivable is 18%primarily based on expectations of credit losses based on historical lifetime loss data as comparedwell as macroeconomic forecasts applied to the federal statutory rateportfolio, which is segmented by factors such as geographic region, delinquency and vintage. Management applies macroeconomic factors such as forecasted trends in unemployment and benchmark credit card charge-off rates, which are sourced externally, using a single scenario to reflect the economic conditions applicable to a particular period. Management also includes qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of 21%. The difference between the effective income tax rate and the federal statutory rate is primarily the result of foreign income taxed at rates other than the federal statutory rate and stock based compensation deductions, partially offset by incremental tax expense related to the intra-group transfer of intellectual property. The Company also benefits from tax rulings concluded in several jurisdictions, most significantly Singapore and Luxembourg.current expected credit losses.
The principal considerations for our determination that performing procedures relating to accountingthe allowance for income taxesloans receivable is a critical audit matter are there was(i) the significant judgment by management in determiningestimating the income tax provision and other tax positions, specifically taxable income by jurisdiction taxed at rates other than the federal statutory rate and the identification of uncertain tax positions and assessment of the technical merits of those positions. Thisallowance for loans receivable, which in turn led to a high level of effort,auditor judgment, subjectivity and degree of subjectivity,effort in performing our audit procedures and in evaluating audit evidence relating to income taxes. Also,management’s application of macroeconomic forecasts and certain qualitative adjustments to the allowance for loans receivable; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures involvedincluded testing the effectiveness of controls relating to accountingthe allowance for income taxes,loans receivable, including controls over the assessmentapplication of uncertain tax positions,macroeconomic forecasts and determination of foreign income taxed at rates other thanqualitative adjustments to the federal statutory rate.allowance. These procedures also included, among others, (1) testing the income tax provision, including taxable income by jurisdiction, (2) testing management’s process for evaluating tax rulings and compliance with related requirements in certain foreign jurisdictions such as Singapore and Luxembourg, (3) testing the identificationinvolvement of reserves for unrecognized tax benefits and the reasonableness of the “more likely than not” determination, which includes certain considerations including, but not limited to, jurisdictions involved, court decisions, legislative actions and guidance, and developments in tax examinations, and (4) testing the calculation of the liability for uncertain tax positions by jurisdiction, including management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained for each uncertain tax position selected for testing. Professionalsprofessionals with specialized skill and knowledge were used to assist in testing management’s process for estimating the allowance for loans receivable. Testing management’s process included (i) evaluating the appropriateness of the methodology and models (ii) testing the completeness and accuracy of certain data used in the estimate, and (iii) evaluating the reasonableness of management’s judgment and estimates, including application of foreignmacroeconomic forecasts and domestic tax laws and regulations.certain qualitative adjustments to the allowance.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 6, 20204, 2021
We have served as the Company’s auditor since 2000.
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CONSOLIDATED BALANCE SHEETS
| As of December 31, | As of December 31, | |||||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||||
| (In millions, except par value) | (In millions, except par value) | |||||||||||||||||
| ASSETS | ASSETS | |||||||||||||||||
| Current assets: | Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 7,349 | $ | 7,575 | Cash and cash equivalents | $ | 4,794 | $ | 7,349 | |||||||||
| Short-term investments | 3,412 | 1,534 | Short-term investments | 8,289 | 3,412 | |||||||||||||
| Accounts receivable, net | 435 | 313 | Accounts receivable, net | 577 | 435 | |||||||||||||
| Loans and interest receivable, net of allowances of $258 in 2019 and $172 in 2018 | 3,972 | 2,532 | ||||||||||||||||
| Loans and interest receivable, net of allowances of $838 and $258 as of December 31, 2020 and 2019, respectively | Loans and interest receivable, net of allowances of $838 and $258 as of December 31, 2020 and 2019, respectively | 2,769 | 3,972 | |||||||||||||||
| Funds receivable and customer accounts | 22,527 | 20,062 | Funds receivable and customer accounts | 33,418 | 22,527 | |||||||||||||
| Prepaid expenses and other current assets | 800 | 947 | Prepaid expenses and other current assets | 1,148 | 800 | |||||||||||||
| Total current assets | 38,495 | 32,963 | Total current assets | 50,995 | 38,495 | |||||||||||||
| Long-term investments | 2,863 | 971 | Long-term investments | 6,089 | 2,863 | |||||||||||||
| Property and equipment, net | 1,693 | 1,724 | Property and equipment, net | 1,807 | 1,693 | |||||||||||||
| Goodwill | 6,212 | 6,284 | Goodwill | 9,135 | 6,212 | |||||||||||||
| Intangible assets, net | 778 | 825 | Intangible assets, net | 1,048 | 778 | |||||||||||||
| Other assets | 1,292 | 565 | Other assets | 1,305 | 1,292 | |||||||||||||
| Total assets | $ | 51,333 | $ | 43,332 | Total assets | $ | 70,379 | $ | 51,333 | |||||||||
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | |||||||||||||||||
| Current liabilities: | Current liabilities: | |||||||||||||||||
| Accounts payable | $ | 232 | $ | 281 | Accounts payable | $ | 252 | $ | 232 | |||||||||
| Short-term debt | — | 1,998 | ||||||||||||||||
| Funds payable and amounts due to customers | 24,527 | 21,562 | Funds payable and amounts due to customers | 35,418 | 24,527 | |||||||||||||
| Accrued expenses and other current liabilities | 2,087 | 2,002 | Accrued expenses and other current liabilities | 2,648 | 2,087 | |||||||||||||
| Income taxes payable | 73 | 61 | Income taxes payable | 129 | 73 | |||||||||||||
| Total current liabilities | 26,919 | 25,904 | Total current liabilities | 38,447 | 26,919 | |||||||||||||
| Deferred tax liability and other long-term liabilities | 2,520 | 2,042 | Deferred tax liability and other long-term liabilities | 2,930 | 2,520 | |||||||||||||
| Long-term debt | 4,965 | — | Long-term debt | 8,939 | 4,965 | |||||||||||||
| Total liabilities | 34,404 | 27,946 | Total liabilities | 50,316 | 34,404 | |||||||||||||
| Commitments and contingencies (Note 13) | Commitments and contingencies (Note 13) | 0 | 0 | |||||||||||||||
| Equity: | Equity: | |||||||||||||||||
| Common stock, $0.0001 par value; 4,000 shares authorized; 1,173 and 1,174 shares outstanding as of December 31, 2019 and 2018, respectively | — | — | ||||||||||||||||
| Common stock, $0.0001 par value; 4,000 shares authorized; 1,172 and 1,173 shares outstanding as of December 31, 2020 and 2019, respectively | Common stock, $0.0001 par value; 4,000 shares authorized; 1,172 and 1,173 shares outstanding as of December 31, 2020 and 2019, respectively | 0 | 0 | |||||||||||||||
| Preferred stock, $0.0001 par value; 100 shares authorized, unissued | — | — | Preferred stock, $0.0001 par value; 100 shares authorized, unissued | 0 | 0 | |||||||||||||
| Treasury stock at cost, 105 and 91 shares as of December 31, 2019 and 2018, respectively | (6,872 | ) | (5,511 | ) | ||||||||||||||
| Treasury stock at cost, 117 and 105 shares as of December 31, 2020 and 2019, respectively | Treasury stock at cost, 117 and 105 shares as of December 31, 2020 and 2019, respectively | (8,507) | (6,872) | |||||||||||||||
| Additional paid-in-capital | 15,588 | 14,939 | Additional paid-in-capital | 16,644 | 15,588 | |||||||||||||
| Retained earnings | 8,342 | 5,880 | Retained earnings | 12,366 | 8,342 | |||||||||||||
| Accumulated other comprehensive income (loss) | (173 | ) | 78 | Accumulated other comprehensive income (loss) | (484) | (173) | ||||||||||||
| Total PayPal Stockholders’ equity | 16,885 | 15,386 | Total PayPal Stockholders’ equity | 20,019 | 16,885 | |||||||||||||
| Noncontrolling interest | 44 | — | Noncontrolling interest | 44 | 44 | |||||||||||||
| Total equity | 16,929 | 15,386 | Total equity | 20,063 | 16,929 | |||||||||||||
| Total liabilities and equity | $ | 51,333 | $ | 43,332 | Total liabilities and equity | $ | 70,379 | $ | 51,333 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||
| (In millions, except for per share amounts) | (In millions, except for per share amounts) | |||||||||||||||||||||||||||
| Net revenues | $ | 17,772 | $ | 15,451 | $ | 13,094 | Net revenues | $ | 21,454 | $ | 17,772 | $ | 15,451 | |||||||||||||||
| Operating expenses: | Operating expenses: | |||||||||||||||||||||||||||
| Transaction expense | 6,790 | 5,581 | 4,419 | Transaction expense | 7,934 | 6,790 | 5,581 | |||||||||||||||||||||
| Transaction and loan losses | 1,380 | 1,274 | 1,011 | |||||||||||||||||||||||||
| Transaction and credit losses | Transaction and credit losses | 1,741 | 1,380 | 1,274 | ||||||||||||||||||||||||
| Customer support and operations | 1,615 | 1,407 | 1,265 | Customer support and operations | 1,778 | 1,615 | 1,407 | |||||||||||||||||||||
| Sales and marketing | 1,401 | 1,314 | 1,142 | Sales and marketing | 1,861 | 1,401 | 1,314 | |||||||||||||||||||||
| Technology and development | 2,085 | 1,831 | 1,740 | Technology and development | 2,642 | 2,085 | 1,831 | |||||||||||||||||||||
| General and administrative | 1,711 | 1,541 | 1,258 | General and administrative | 2,070 | 1,711 | 1,541 | |||||||||||||||||||||
| Restructuring and other charges | 71 | 309 | 132 | Restructuring and other charges | 139 | 71 | 309 | |||||||||||||||||||||
| Total operating expenses | 15,053 | 13,257 | 10,967 | Total operating expenses | 18,165 | 15,053 | 13,257 | |||||||||||||||||||||
| Operating income | 2,719 | 2,194 | 2,127 | Operating income | 3,289 | 2,719 | 2,194 | |||||||||||||||||||||
| Other income (expense), net | 279 | 182 | 73 | Other income (expense), net | 1,776 | 279 | 182 | |||||||||||||||||||||
| Income before income taxes | 2,998 | 2,376 | 2,200 | Income before income taxes | 5,065 | 2,998 | 2,376 | |||||||||||||||||||||
| Income tax expense | 539 | 319 | 405 | Income tax expense | 863 | 539 | 319 | |||||||||||||||||||||
| Net income | $ | 2,459 | $ | 2,057 | $ | 1,795 | Net income | $ | 4,202 | $ | 2,459 | $ | 2,057 | |||||||||||||||
| Net income per share: | Net income per share: | |||||||||||||||||||||||||||
| Basic | $ | 2.09 | $ | 1.74 | $ | 1.49 | Basic | $ | 3.58 | $ | 2.09 | $ | 1.74 | |||||||||||||||
| Diluted | $ | 2.07 | $ | 1.71 | $ | 1.47 | Diluted | $ | 3.54 | $ | 2.07 | $ | 1.71 | |||||||||||||||
| Weighted average shares: | Weighted average shares: | |||||||||||||||||||||||||||
| Basic | 1,174 | 1,184 | 1,203 | Basic | 1,173 | 1,174 | 1,184 | |||||||||||||||||||||
| Diluted | 1,188 | 1,203 | 1,221 | Diluted | 1,187 | 1,188 | 1,203 | |||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||
| Net income | $ | 2,459 | $ | 2,057 | $ | 1,795 | Net income | $ | 4,202 | $ | 2,459 | $ | 2,057 | |||||||||||||||
| Other comprehensive income (loss), net of reclassification adjustments: | Other comprehensive income (loss), net of reclassification adjustments: | |||||||||||||||||||||||||||
| Foreign currency translation adjustments (“CTA”) | (57 | ) | (68 | ) | 43 | Foreign currency translation adjustments (“CTA”) | (48) | (57) | (68) | |||||||||||||||||||
| Net investment hedge CTA loss | (31 | ) | — | — | ||||||||||||||||||||||||
| Net investment hedge CTA gain (loss) | Net investment hedge CTA gain (loss) | 55 | (31) | 0 | ||||||||||||||||||||||||
| Unrealized (losses) gains on cash flow hedges, net | (176 | ) | 293 | (242 | ) | Unrealized (losses) gains on cash flow hedges, net | (329) | (176) | 293 | |||||||||||||||||||
| Tax benefit (expense) on unrealized (losses) gains on cash flow hedges, net | 3 | (5 | ) | 4 | Tax benefit (expense) on unrealized (losses) gains on cash flow hedges, net | 4 | 3 | (5) | ||||||||||||||||||||
| Unrealized gains (losses) on investments, net | 15 | (1 | ) | (7 | ) | Unrealized gains (losses) on investments, net | 9 | 15 | (1) | |||||||||||||||||||
| Tax (expense) benefit on unrealized gains (losses) on investments, net | (5 | ) | 1 | 1 | Tax (expense) benefit on unrealized gains (losses) on investments, net | (2) | (5) | 1 | ||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (251 | ) | 220 | (201 | ) | Other comprehensive income (loss), net of tax | (311) | (251) | 220 | |||||||||||||||||||
| Comprehensive income | $ | 2,208 | $ | 2,277 | $ | 1,594 | Comprehensive income | $ | 3,891 | $ | 2,208 | $ | 2,277 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock Shares | Treasury Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock Shares | Treasury Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2016 | 1,207 | $ | (995 | ) | $ | 13,579 | $ | 59 | $ | 2,069 | $ | — | $ | 14,712 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,795 | — | 1,795 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | 43 | — | — | 43 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized losses on cash flow hedges, net | — | — | — | (242 | ) | — | — | (242 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax benefit on unrealized losses on cash flow hedges, net | — | — | — | 4 | — | — | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized losses on investments, net | — | — | — | (7 | ) | — | — | (7 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax benefit on unrealized losses on investments, net | — | — | — | 1 | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 13 | — | (21 | ) | — | — | — | (21 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchased | (20 | ) | (1,006 | ) | — | — | — | — | (1,006 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 756 | — | — | — | 756 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax adjustment for intra entity transfers | — | — | — | — | (41 | ) | — | (41 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2017 | 1,200 | $ | (2,001 | ) | $ | 14,314 | $ | (142 | ) | $ | 3,823 | $ | — | $ | 15,994 | Balances at December 31, 2017 | 1,200 | $ | (2,001) | $ | 14,314 | $ | (142) | $ | 3,823 | $ | 0 | $ | 15,994 | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 2,057 | — | 2,057 | Net income | — | — | — | — | 2,057 | — | 2,057 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | (68 | ) | — | — | (68 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gains on cash flow hedges, net | — | — | — | 293 | — | — | 293 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign CTA | Foreign CTA | — | — | — | (68) | — | — | (68) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges, net | Unrealized gain on cash flow hedges, net | — | — | — | 293 | — | — | 293 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax expense on unrealized gains on cash flow hedges, net | — | — | — | (5 | ) | — | — | (5 | ) | Tax expense on unrealized gains on cash flow hedges, net | — | — | — | (5) | — | — | (5) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized losses on investments, net | — | — | — | (1 | ) | — | — | (1 | ) | Unrealized losses on investments, net | — | — | — | (1) | — | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax benefit on unrealized losses on investments, net | — | — | — | 1 | — | — | 1 | Tax benefit on unrealized losses on investments, net | — | — | — | 1 | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 18 | — | (251 | ) | — | — | — | (251 | ) | Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 18 | — | (251) | — | — | — | (251) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchased | (44 | ) | (3,510 | ) | (15 | ) | — | — | — | (3,525 | ) | Common stock repurchased | (44) | (3,510) | (15) | — | — | — | (3,525) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 891 | — | — | — | 891 | Stock-based compensation | — | — | 891 | — | — | — | 891 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2018 | 1,174 | $ | (5,511 | ) | $ | 14,939 | $ | 78 | $ | 5,880 | $ | — | $ | 15,386 | Balances at December 31, 2018 | 1,174 | $ | (5,511) | $ | 14,939 | $ | 78 | $ | 5,880 | $ | 0 | $ | 15,386 | |||||||||||||||||||||||||||||||||||||||
| Adoption of lease accounting standard | 3 | — | 3 | Adoption of lease accounting standard | 3 | — | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 2,459 | — | 2,459 | Net income | — | — | — | — | 2,459 | — | 2,459 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | (57 | ) | — | — | (57 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign CTA | Foreign CTA | — | — | — | (57) | — | — | (57) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net investment hedge CTA loss | — | — | — | (31 | ) | — | — | (31 | ) | Net investment hedge CTA loss | (31) | (31) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized losses on cash flow hedges, net | — | — | — | (176 | ) | — | — | (176 | ) | Unrealized losses on cash flow hedges, net | — | — | — | (176) | — | — | (176) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax benefit on unrealized losses on cash flow hedges, net | — | — | — | 3 | — | — | 3 | Tax benefit on unrealized losses on cash flow hedges, net | — | — | — | 3 | — | — | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gains on investments, net | — | — | — | 15 | — | — | 15 | Unrealized gains on investments, net | — | — | — | 15 | — | — | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax expense on unrealized gains on investments, net | — | — | — | (5 | ) | — | — | (5 | ) | Tax expense on unrealized gains on investments, net | — | — | — | (5) | — | — | (5) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 13 | — | (365 | ) | — | — | — | (365 | ) | Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 13 | — | (365) | — | — | — | (365) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchased | (14 | ) | (1,361 | ) | (45 | ) | — | — | — | (1,406 | ) | Common stock repurchased | (14) | (1,361) | (45) | — | — | — | (1,406) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,059 | — | — | — | 1,059 | Stock-based compensation | — | — | 1,059 | — | — | — | 1,059 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of noncontrolling interest | — | — | — | — | — | 44 | 44 | Purchase of noncontrolling interest | — | — | — | — | — | 44 | 44 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2019 | 1,173 | $ | (6,872 | ) | $ | 15,588 | $ | (173 | ) | $ | 8,342 | $ | 44 | $ | 16,929 | Balances at December 31, 2019 | 1,173 | $ | (6,872) | $ | 15,588 | $ | (173) | $ | 8,342 | $ | 44 | $ | 16,929 | ||||||||||||||||||||||||||||||||||||||
| Adoption of current expected credit loss standard | Adoption of current expected credit loss standard | — | — | — | — | (178) | — | (178) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | Net income | — | — | — | — | 4,202 | — | 4,202 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign CTA | Foreign CTA | — | — | — | (48) | — | — | (48) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net investment hedge CTA gain | Net investment hedge CTA gain | — | — | — | 55 | — | — | 55 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized losses on cash flow hedges, net | Unrealized losses on cash flow hedges, net | — | — | — | (329) | — | — | (329) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax benefit on unrealized losses on cash flow hedges, net | Tax benefit on unrealized losses on cash flow hedges, net | — | — | — | 4 | — | — | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gains on investments, net | Unrealized gains on investments, net | — | — | — | 9 | — | — | 9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax expense on unrealized gains on investments, net | Tax expense on unrealized gains on investments, net | — | — | — | (2) | — | — | (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes | 11 | — | (365) | — | — | — | (365) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchased | Common stock repurchased | (12) | (1,635) | — | — | — | — | (1,635) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | Stock-based compensation | — | — | 1,421 | — | — | — | 1,421 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | Balances at December 31, 2020 | 1,172 | $ | (8,507) | $ | 16,644 | $ | (484) | $ | 12,366 | $ | 44 | $ | 20,063 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income | $ | 4,202 | $ | 2,459 | $ | 2,057 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Transaction and credit losses | 1,741 | 1,380 | 1,274 | ||||||||||||||
| Depreciation and amortization | 1,189 | 912 | 776 | ||||||||||||||
| Stock-based compensation | 1,376 | 1,021 | 853 | ||||||||||||||
| Deferred income taxes | 165 | (269) | (171) | ||||||||||||||
| Cost basis adjustments to loans and interest receivable held for sale | 0 | 0 | 244 | ||||||||||||||
| Net gains on strategic investments | (1,914) | (208) | (87) | ||||||||||||||
| Other | 47 | (149) | (85) | ||||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||
| Accounts receivable | (100) | (120) | (59) | ||||||||||||||
| Changes in loans and interest receivable held for sale, net | 0 | 4 | 1,407 | ||||||||||||||
| Transaction loss allowance for cash losses, net | (1,120) | (1,079) | (1,046) | ||||||||||||||
| Other current assets and non-current assets | (498) | (566) | (93) | ||||||||||||||
| Accounts payable | (4) | 4 | 26 | ||||||||||||||
| Income taxes payable | (230) | (40) | (44) | ||||||||||||||
| Other current liabilities and non-current liabilities | 1,000 | 722 | 428 | ||||||||||||||
| Net cash provided by operating activities | 5,854 | 4,071 | 5,480 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Purchases of property and equipment | (866) | (704) | (823) | ||||||||||||||
| Proceeds from sales of property and equipment | 120 | 17 | 3 | ||||||||||||||
| Changes in principal loans receivable, net | 294 | (1,631) | 3,121 | ||||||||||||||
| Purchases of investments | (41,513) | (27,881) | (22,381) | ||||||||||||||
| Maturities and sales of investments | 30,908 | 24,878 | 21,898 | ||||||||||||||
| Acquisitions, net of cash and restricted cash acquired | (3,609) | (70) | (2,124) | ||||||||||||||
| Funds receivable | (1,552) | (351) | 1,127 | ||||||||||||||
| Net cash (used in) provided by investing activities | (16,218) | (5,742) | 821 | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Proceeds from issuance of common stock | 137 | 138 | 144 | ||||||||||||||
| Purchases of treasury stock | (1,635) | (1,411) | (3,520) | ||||||||||||||
| Tax withholdings related to net share settlements of restricted stock units and restricted stock awards | (521) | (504) | (419) | ||||||||||||||
| Borrowings under financing arrangements | 6,966 | 5,471 | 2,075 | ||||||||||||||
| Repayments under financing arrangements | (3,000) | (2,516) | (1,115) | ||||||||||||||
| Funds payable and amounts due to customers | 10,597 | 3,009 | 1,595 | ||||||||||||||
| Other financing activities | (52) | 0 | 0 | ||||||||||||||
| Net cash provided by (used in) financing activities | 12,492 | 4,187 | (1,240) | ||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 169 | (6) | (113) | ||||||||||||||
| Net change in cash, cash equivalents, and restricted cash | 2,297 | 2,510 | 4,948 | ||||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 15,743 | 13,233 | 8,285 | ||||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 18,040 | $ | 15,743 | $ | 13,233 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 2,459 | $ | 2,057 | $ | 1,795 | |||||
| Adjustments: | |||||||||||
| Transaction and loan losses | 1,380 | 1,274 | 1,011 | ||||||||
| Depreciation and amortization | 912 | 776 | 805 | ||||||||
| Stock-based compensation | 1,021 | 853 | 733 | ||||||||
| Deferred income taxes | (269 | ) | (171 | ) | (1,299 | ) | |||||
| Cost basis adjustments to loans and interest receivable held for sale | — | 244 | 92 | ||||||||
| Unrealized (gains) losses on strategic investments | (207 | ) | (86 | ) | — | ||||||
| Other | (150 | ) | (86 | ) | (25 | ) | |||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | (120 | ) | (59 | ) | 12 | ||||||
| Changes in loans and interest receivable held for sale, net | 4 | 1,407 | (1,308 | ) | |||||||
| Transaction loss allowance for cash losses, net | (1,079 | ) | (1,046 | ) | (817 | ) | |||||
| Funds receivable | (9 | ) | (19 | ) | — | ||||||
| Other current assets and non-current assets | (566 | ) | (93 | ) | (188 | ) | |||||
| Accounts payable | 4 | 26 | 62 | ||||||||
| Funds payable and amounts due to customers | 499 | 22 | — | ||||||||
| Income taxes payable | (40 | ) | (44 | ) | 19 | ||||||
| Other current liabilities and non-current liabilities | 722 | 428 | 1,639 | ||||||||
| Net cash provided by operating activities | 4,561 | 5,483 | 2,531 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (704 | ) | (823 | ) | (667 | ) | |||||
| Proceeds from sales of property and equipment | 17 | 3 | — | ||||||||
| Changes in principal loans receivable, net | (1,631 | ) | 3,121 | (920 | ) | ||||||
| Purchases of investments | (27,881 | ) | (22,381 | ) | (19,418 | ) | |||||
| Maturities and sales of investments | 24,878 | 21,898 | 18,448 | ||||||||
| Acquisitions, net of cash and restricted cash acquired | (70 | ) | (2,124 | ) | (323 | ) | |||||
| Funds receivable | (342 | ) | 1,146 | (1,605 | ) | ||||||
| Net cash (used in) provided by investing activities | (5,733 | ) | 840 | (4,485 | ) | ||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of common stock | 138 | 144 | 144 | ||||||||
| Purchases of treasury stock | (1,411 | ) | (3,520 | ) | (1,006 | ) | |||||
| Tax withholdings related to net share settlements of restricted stock units and restricted stock awards | (504 | ) | (419 | ) | (166 | ) | |||||
| Borrowings under financing arrangements | 5,471 | 2,075 | 1,800 | ||||||||
| Repayments under financing arrangements | (2,516 | ) | (1,115 | ) | (980 | ) | |||||
| Funds payable and amounts due to customers | 2,510 | 1,573 | 4,292 | ||||||||
| Net cash provided by (used in) financing activities | 3,688 | (1,262 | ) | 4,084 | |||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (6 | ) | (113 | ) | 36 | ||||||
| Net change in cash, cash equivalents, and restricted cash | 2,510 | 4,948 | 2,166 | ||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 13,233 | 8,285 | 6,119 | ||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 15,743 | $ | 13,233 | $ | 8,285 | |||||
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PayPal Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||
| (In millions) | (In millions) | |||||||||||||||||||||||||||
| Supplemental cash flow disclosures: | Supplemental cash flow disclosures: | |||||||||||||||||||||||||||
| Cash paid for interest | $ | 78 | $ | 69 | $ | 6 | Cash paid for interest | $ | 190 | $ | 78 | $ | 69 | |||||||||||||||
| Cash paid for income taxes, net | $ | 665 | $ | 328 | $ | 117 | Cash paid for income taxes, net | $ | 565 | $ | 665 | $ | 328 | |||||||||||||||
| The below table reconciles cash, cash equivalents, and restricted cash as reported in the consolidated balance sheets to the total of the same amounts shown in the consolidated statements of cash flows: | The below table reconciles cash, cash equivalents, and restricted cash as reported in the consolidated balance sheets to the total of the same amounts shown in the consolidated statements of cash flows: | |||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 7,349 | $ | 7,575 | $ | 2,883 | Cash and cash equivalents | $ | 4,794 | $ | 7,349 | $ | 7,575 | |||||||||||||||
| Short-term investments | 7 | 16 | 15 | |||||||||||||||||||||||||
| Short-term and long-term investments | Short-term and long-term investments | 24 | 7 | 16 | ||||||||||||||||||||||||
| Funds receivable and customer accounts | 8,387 | 5,642 | 5,387 | Funds receivable and customer accounts | 13,222 | 8,387 | 5,642 | |||||||||||||||||||||
| Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 15,743 | $ | 13,233 | $ | 8,285 | Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 18,040 | $ | 15,743 | $ | 13,233 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PayPal Holdings, Inc. (“PayPal,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware in January 2015 and is 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 empowering peopleto increase economic opportunity for entrepreneurs and businesses to join and thrive inbusiness of all sizes around the global economy.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.device when sending payments or getting paid. We also facilitate person-to-person (“P2P”) payments through our PayPal, Venmo, and Xoom products.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 iZettleHyperwallet products and services, comprise our proprietary Payments Platform. The terms “we,” “our,” “us,” “the Company,” and “PayPal” mean PayPal Holdings, Inc. and, unless otherwise expressly stated or the context requires, its subsidiaries.
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus by regulators globally 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 asindustry, including 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 theThe 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 lawschanges to their interpretation and regulations are interpreted and implemented,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. Therefore, weWe monitor these areas closely to designand are focused on designing compliant solutions for our customers who depend on us.customers.
Basis of Presentationpresentation and Principlesprinciples of Consolidationconsolidation
The accompanying consolidated financial statements include the financial statements of PayPal and our wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Noncontrolling interest reported as a component of equity on our consolidated balance sheets represents the equity interests not owned by PayPal and is recorded for consolidated entities we control inand of which we own less than 100%. Noncontrolling interest is not presented separately on our consolidated statements of income as the amount is de minimis.
Investments in entities where we have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. For such investments, our share of the investee’s results of operations is included in other income (expense), net on our consolidated statements of income and our investment balance is included in long-term investments on our consolidated balance sheets. Investments in entities where we do not have the ability to exercise significant influence over the investee are accounted for at fair value or cost minus impairment, if any, adjusted for changes resulting from observable price changes, which are included in other income (expense), net on our consolidated statements of income. Our investment balance is included in long-term investments on our consolidated balance sheets.
We determine at the inception of each investment, and re-evaluate if certain events occur, whether an entity in which we have made an investment is considered a variable interest entity (“VIE”). If we determine an investment is a VIE, we then assess if we are the primary beneficiary, which would require consolidation. As of December 31, 2020, none of these VIEs qualified for consolidation as the structures of these entities do not provide us with the ability to direct the activities that would significantly impact their economic performance. The carrying value of our investments that are VIEs was de minimis and included as non-marketable equity securities accounted for using the equity method of accounting in long-term investments on our consolidated balance sheets. Our maximum exposure to loss, including the carrying value of the investments and any future funding commitments, was $105 million as of December 31, 2020.
In the opinion of management, these consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the consolidated financial statements for all periods presented.
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Certain amounts for prior years have been reclassified to conform to the financial statement presentation as of and for the year ended December 31, 2019.2020.
Reclassifications
Beginning with the firstfourth quarter of 2019,2020, we reclassified certain cash flows related to customer balances from cash flows from operating expensesactivities to cash flows from investing activities and cash flows from financing activities within the consolidated statements of income.cash flows. Prior period amounts have been reclassified to conform to thisthe current period presentation. These changes have no impact on our previously reported consolidated net income, for prior periods, including total operating expenses, financial position, net change in cash, cash equivalents, and restricted cash, or total cash, flows for any periods presented.
The current period presentation classifies all changes in funds receivable and customer accounts and funds payable and amounts due to customers consistently on our consolidated statement of cash flows as cash flows from investing activities and cash flows from financing activities, respectively, regardless of which product the cash flows relate to on our Payments Platform. The current period presentation of depreciation and amortization expense asprovides a separate financial statement caption by reclassifying these expenses into financial statement captions aligned with the internal organizations that are the primary beneficiariesmore meaningful representation of the depreciationcash flows related to the movement of customer funds due to the restrictions on and amortizationuse of such assets.those funds.
The following tables present the effects of the changes on the presentation of these operating expensescash flows to the previously reported consolidated statements of income:cash flows:
| Year Ended December 31, 2018 | |||||||||||
| (In millions) | |||||||||||
As Previously Reported (*) | Adjustments | Reclassified | |||||||||
| Transaction expense | $ | 5,581 | $ | — | $ | 5,581 | |||||
| Transaction and loan losses | 1,274 | — | 1,274 | ||||||||
| Customer support and operations | 1,482 | (75 | ) | 1,407 | |||||||
| Sales and marketing | 1,313 | 1 | 1,314 | ||||||||
| Product development | 1,071 | (1,071 | ) | — | |||||||
| Technology and development | — | 1,831 | 1,831 | ||||||||
| General and administrative | 1,451 | 90 | 1,541 | ||||||||
| Depreciation and amortization | 776 | (776 | ) | — | |||||||
| Restructuring and other charges | 309 | — | 309 | ||||||||
| Total operating expenses | $ | 13,257 | $ | — | $ | 13,257 | |||||
| Year Ended December 31, 2019 | |||||||||||||||||
| (In millions) | |||||||||||||||||
As Previously Reported (1) | Adjustments | Reclassified | |||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
Operating activities(2) | $ | 4,561 | $ | (490) | $ | 4,071 | |||||||||||
Investing activities(3) | (5,733) | (9) | (5,742) | ||||||||||||||
Financing activities(4) | 3,688 | 499 | 4,187 | ||||||||||||||
| Effect of exchange rates on cash, cash equivalents, and restricted cash | (6) | 0 | (6) | ||||||||||||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 2,510 | $ | 0 | $ | 2,510 | |||||||||||
| Year Ended December 31, 2017 | |||||||||||
| (In millions) | |||||||||||
As Previously Reported (*) | Adjustments | Reclassified | |||||||||
| Transaction expense | $ | 4,419 | $ | — | $ | 4,419 | |||||
| Transaction and loan losses | 1,011 | — | 1,011 | ||||||||
| Customer support and operations | 1,364 | (99 | ) | 1,265 | |||||||
| Sales and marketing | 1,128 | 14 | 1,142 | ||||||||
| Product development | 953 | (953 | ) | — | |||||||
| Technology and development | — | 1,740 | 1,740 | ||||||||
| General and administrative | 1,155 | 103 | 1,258 | ||||||||
| Depreciation and amortization | 805 | (805 | ) | — | |||||||
| Restructuring and other charges | 132 | — | 132 | ||||||||
| Total operating expenses | $ | 10,967 | $ | — | $ | 10,967 | |||||
(4) Financial statement line impacted in financing activities was “Funds payable and amounts due to customers.”
| Year Ended December 31, 2018 | |||||||||||||||||
| (In millions) | |||||||||||||||||
As Previously Reported (1) | Adjustments | Reclassified | |||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
Operating activities(2) | $ | 5,483 | $ | (3) | $ | 5,480 | |||||||||||
Investing activities(3) | 840 | (19) | 821 | ||||||||||||||
Financing activities(4) | (1,262) | 22 | (1,240) | ||||||||||||||
| Effect of exchange rates on cash, cash equivalents, and restricted cash | (113) | 0 | (113) | ||||||||||||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 4,948 | $ | 0 | $ | 4,948 | |||||||||||
(1) As reported in our 20182019 Form 10-K datedfiled with the SEC on February 7, 2019.6, 2020.
(2) Financial statement lines impacted in operating activities were “Funds receivable” and “Funds payable and amounts due to customers,” which increased by $19 million and decreased by $22 million, respectively, to arrive at the reclassified amounts.
(3) Financial statement line impacted in investing activities was “Funds receivable.”
(4) Financial statement line impacted in financing activities was “Funds payable and amounts due to customers.”
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Use of estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and loancredit losses, loss contingencies, income taxes, revenue recognition, and the valuation of goodwill and intangible assets. We base our estimates on historical experience and various other assumptions which we believe to be reasonable under the circumstances. These estimates may change as new events occur, and as additional information surrounding the continued impact of the novel coronavirus (“COVID-19”) pandemic becomes available. Actual results could differ from those estimates.these estimates and any such differences may be material to our financial statements.
Cash and cash equivalents
Cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less when purchased and are composed of primarily bank deposits, government and agency securities, and commercial paper.
Investments
Short-term investments include time deposits, government and agency securities, and corporate debt securities with original maturities of greater than three months but less than one year when purchased or maturities of less than one year on the reporting date. Long-term investments include time deposits, government and agency securities, and corporate debt securities, and asset-backed securities with maturities exceeding one year, and our strategic investments. Government and agency securities, and corporate debt securities, and asset-backed securities are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits.
We elect to account for foreign currency denominated available-for-sale investments underlying funds receivable and customer accounts, short-term investments, and long-term investments under the fair value option as further discussed in “Note 9—Fair Value Measurement of Assets and Liabilities.” The changes in fair value related to initial measurement and subsequent changes in fair value are included in earnings as a component of other income (expense), net.
Our strategic investments consist of marketable equity securities, which are publicly traded, and non-marketable equity securities, which are investments in privately held companies. Marketable equity securities have readily determinable fair values with changes in fair value recorded in other income (expense), net. Non-marketable equity securities include investments that do not have a readily determinable fair value, andas well as equity method investments. The investments that do not have readily determinable fair value are measured at cost minus impairment, if any, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Measurement Alternative”). All gains and losses on these investments, realized and unrealized, are recognizedrecorded in other income (expense), net on our consolidated statements of income. Our investments where we have the ability to exercise significant influence, but not control, over the investee are accounted for as equity method investments and our share of the investee’s results of operations is included in other income (expense), net.
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We assess whether an impairment loss on our non-marketable equity securities and an other-than-temporary impairment loss on our debt securities and equity method investments (and available-for-sale debt securities, prior to 2020) has occurred due to declines in fair value or other market conditions. If any impairment is identified for non-marketable equity securities or impairment is considered other than temporaryother-than-temporary for our debt securities and equity method investments (and available-for-sale debt securities, prior to 2020), we write down the investment to its fair value and record the corresponding charge through other income (expense), net in our consolidated statements of income. With respect to our available-for-sale debt securities, prior to 2020, this assessment takestook into account the severity and duration of the decline in value, our intent to sell the security, whether it was more likely than not we would be required to sell the security before recovery of its amortized cost basis, and whether we expected to recover the entire amortized cost basis of the security (that is, whether a credit loss existed). Beginning in 2020, our available-for-sale debt securities in an unrealized loss position will be written down to fair value through a charge to other income (expense), net in our consolidated statements of income if we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis,basis. For the remaining available-for-sale debt securities in an unrealized loss position, if we identify that the decline in fair value has resulted from credit losses, taking into consideration changes to the rating of the security by rating agencies, implied yields versus benchmark yields, and whetherthe extent to which fair value is less than amortized cost, among other factors, we expectwill estimate the present value of cash flows expected to recoverbe collected. If the entirepresent value of cash flows expected to be collected is less than the amortized cost basis, of the security (that is, whether a credit loss exists).exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any portion of impairment not related to credit losses is recognized in other comprehensive income.
Loans and interest receivable, net
Loans and interest receivable, net represents merchant receivables originated under our PayPal Working Capital (“PPWC”) product and PayPal Business Loan (“PPBL”) product and international consumer loans originated under our PayPal Credit product. and installment credit products.
In the U.S., we partner with an independent chartered financial institutionsinstitution that extendextends credit to the merchantmerchants using our PPWC product or PPBL product and purchase the related receivables extended by the independent chartered financial institutions.
As part of our arrangementsarrangement with the independent chartered financial institutionsinstitution in the U.S., we sell back a participation interest in the pool of merchant receivables. For these arrangements, gains or losses on the sale of the participation interest are not material as the carrying amount of the participation interest sold approximates the fair value at time of transfer. The independent chartered financial institutions haveinstitution has no recourse against us related to their participation interests for failure of debtors to pay when due. The participation interests held by the chartered financial institutionsinstitution have the same priority to the interests held by us and are subject to the same credit, prepayment, and interest rate risk associated with this pool of merchant receivables. All risks of loss are shared pro rata based on participation interests held among all participating stakeholders. We apply a control-oriented, financial-components approach and account for the asset transfer as a sale and derecognize the portion of the participation interestinterests for which control has been surrendered. For this arrangement, gains or losses on the sale of the participation interests are not material as the carrying amount of the participation interest sold approximates the fair value at time of transfer.
In instances where a merchant is able to demonstrate that they are experiencing financial difficulty, there may be a modification of the loans or advances and the related interest receivable for which it is probable that, without modification, we will be unable to collect all amounts due, therefore resulting in a troubled debt restructuring (“TDR”). Refer to “Note 11—Loans and Interest Receivable” for further information related to TDRs.
Loans, advances, and interest and fees receivable are reported at their outstanding principal balances, net of any participation interestinterests sold and pro rata allowances,current expected credit losses, including unamortized deferred origination costs and estimated collectible interest and fees.costs. We maintain the servicing rights for the entire pool of consumer and merchant receivables outstanding and receive a fee approximating the fair value for servicing the assets underlying the participation interest sold.
We offer both revolving and installment credit products to our consumers. The terms of our consumer relationships require us to submit monthly bills to the consumer detailing loan repayment requirements. The terms also allow us to charge the consumer interest and fees in certain circumstances. Due to the relatively small dollar amount of individual loans and interest receivable, we do not require collateral on these balances.
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U.S. Consumer Credit Portfolio
In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolio to Synchrony Bank (“Synchrony”). 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. We no longer hold an ownership interest in the receivables generated through the program (other than charged off or designated to be charged off receivables) and thus, no longer record these receivables on our consolidated financial statements. PayPal earns a revenue share on the portfolio of consumer receivables owned by Synchrony, which includes both the sold and newly generated receivables, and it is recorded in revenuerevenues from other value added services on our consolidated financial statements. See “Note 11—Loans and Interest Receivable” for additional information related to this arrangement.statements of income.
Allowance for loans and interest receivable
The allowance for loans and interest receivable represents management’sour estimate of incurredcurrent expected credit losses inherent in our portfolio of loans and interest receivables. Increases to the allowance for loans receivablesreceivable are reflected as a component of transaction and loancredit losses on our consolidated financial statements.statements of income. Increases to the allowance for interest and fees receivable are reflected as a reduction of net revenues on our consolidated statements of income, or as a reduction of deferred revenue when interest and fees are billed at the inception of a loan or advance. The evaluation process to assess the adequacy of allowances is subject to numerous estimates and principle judgments.
Prior to 2020, the allowance for our consumer loans receivable the allowance iswas primarily based on forecasted principal balance delinquency rates (“roll rates”). Roll rates are the percentage of balances which we estimate willwould 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 arewere applied to the principal amount of our consumer receivables for each stage of delinquency, from current to 180179 days past the payment due date, in order to estimate the principal loans which havehad incurred losses and arewere probable to be charged off. We charge off consumer loanFor merchant loans and advances receivable, the allowance was primarily based on principal balances, inforecasted delinquency rates, and recoveries through the month in whichuse of a customer’s balance becomes 180vintage-based loss forecasting model. The determination of delinquency, from current to 179 days past due, for principal balances related to merchant receivables outstanding was based on the payment due date.current expected or contractual repayment period of the loan or advance and interest or fixed fee as compared to the original expected or contractual repayment period. The allowance for loss against interest receivable was primarily determined 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 had incurred losses and were probable to be charged off. The allowance for fees receivable was primarily based on fee balances, forecasted delinquency rates, and recoveries through the use of a vintage-based loss forecasting model.
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In connection with our agreement to sell our U.S. consumer credit receivables to Synchrony and the designation of that portfolio as held for sale, in November 2017, we reversed the corresponding allowances against those loans and interest receivable balances. Such allowances on any newly originated U.S. consumer loans and interest receivables, held for sale were not established. Adjustments to the cost basis of this portfolio until the sale was completed in July 2018, which were primarily driven by charge-offs, were recorded in restructuring and other charges inon our consolidated statements of income.
Customer accounts
We hold all customer balances, both in the U.S. and internationally, as direct claims against us which are reflected on our consolidated balance sheets as a liability classified as amounts due to customers. Certain jurisdictions where PayPal operates require us to hold eligible liquid assets, as defined by applicable regulatory requirements and commercial law in these jurisdictions, equal to at least 100% of the aggregate amount of all customer balances. Therefore, we restrict the use of the assets underlying the customer balances to meet these regulatory requirements and separately classify the assets as customer accounts in our consolidated balance sheets. We classify the assets underlying the customer balances as current based on their purpose and availability to fulfill our direct obligation under amounts due to customers. Customer funds wherebyfor which PayPal is an agent and custodian on behalf of our customers are not reflected on our consolidated balance sheet.sheets. These funds include U.S. dollar funds which are deposited at one or more third-party financial institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) and are eligible for FDIC pass-through insurance (subject to applicable limits). We act as an agent in facilitating cryptocurrency transactions on behalf of our customers. Cryptocurrencies held on behalf of our customers are not PayPal’s assets and therefore are not reflected on our consolidated balance sheets.
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, 2019,2020, the cumulative amount approved by management to be designated for credit activities aggregated to $2.0 billion and represented approximately 31%21% of European customer balances potentially available for our corporate use by us at that date, as determined by applying financial regulations maintained by the CSSF. OnAt the datetime PayPal’s management designates the European customer balances held in our Luxembourg banking subsidiary to be used to extend credit, the balances are classified as cash and cash equivalents and no longer classified as customer accounts on our consolidated balance sheets. The remaining assets underlying the customer balances remain separately classified as customer accounts on our consolidated balance sheets. We do not commingle these customer accounts with corporate funds and maintain these assets separately in interest and non-interest bearing bank deposits, time deposits, corporate debt securities, and government and agency securities, and asset-backed securities. See “Note 8—Funds Receivable and Customer Accounts and Investments” for additional information related to customer accounts.
We have generally presentedpresent changes in funds receivable and customer accounts as cash flows from investing activities in our consolidated statements of cash flows based on the nature of the activity underlying our customer accounts.
Funds receivable and funds payable
Funds receivable and funds payable arise due to the time required to initiate collection from and clear transactions through external payment networks. When customers fund their PayPal account using their bank account, credit card, debit card, or withdraw funds from their PayPal account to their bank account or through a debit card transaction, there is a clearing period before the cash is received or settled, usually one to three business days for U.S. transactions and generally up to five business days for international transactions. In addition, a portion of our customers’ funds are settled directly to their bank account. These funds are also classified as funds receivable and funds payable and arise due to the time required to initiate collection from and clear transactions through external payment networks. These funds are classified differently on our consolidated statements of cash flows as operating activities based on the nature of this activity.
Property and equipment
Property and equipment consists primarily of computer equipment, software and website development costs, land and buildings, and leasehold improvements. Property and equipment are stated at historical cost less accumulated depreciation.depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets; generally, one to threefour years for computer equipment and software, including capitalized software and website development costs, three years for furniture and fixtures, up to thirty30 years for buildings and building improvements, and the shorter of five years or the non-cancelable term of the lease for leasehold improvements.
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Leases
We determine whether an arrangement is a lease for accounting purposes at contract inception. Operating leases are recorded as right-of-use (“ROU”) assets, which are included in other assets, and lease liabilities, which are included in accrued expenses and other current liabilities and deferred tax liability and other long-term liabilities on our consolidated balance sheets. For sale-leaseback transactions, we evaluate the sale and the lease arrangement based on our conclusion as to whether control of the underlying asset has been transferred and recognize the sale-leaseback as either a sale transaction or under the financing method. The financing method requires the asset to remain on our consolidated balance sheets throughout the term of the lease and the proceeds to be recognized as a financing obligation. As of December 31, 2019,2020, we had no finance leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit rate;rate and therefore we use an incremental borrowing rate for specific terms on a collateralized basis based on the information available on the commencement date in determining the present value of lease payments. The ROU asset calculation includes lease payments to be made and excludes lease incentives. The ROU asset and lease liability may include amounts attributed to options to extend or terminate the lease when it is reasonably certain we will exercise that option. When we reach a decision to exercise a lease renewal or termination option, we recognize the associated impact to the ROU asset and lease liability. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
We evaluate ROU assets related to leases for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount of an ROU asset may not be recoverable. When a decision has been made to exit a lease prior to the contractual term or to sublease that space, we evaluate the asset for impairment and recognize the associated impact to the ROU asset and related expense, if applicable. The evaluation is performed at the asset group level initially and when appropriate, at the lowest level of identifiable cash flows, which is at the individual lease level. Undiscounted cash flows expected to be generated by the related ROU assets are estimated over the ROU assets’ useful lives. If the evaluation indicates that the carrying amount of the ROU assets may not be recoverable, any potential impairment is measured based upon the fair value of the related ROU asset or asset group as determined by appropriate valuation techniques.
We have lease agreements with lease and non-lease components. We have elected to apply the practical expedient and account for the lease and non-lease components as a single lease component for all leases.leases, where applicable. In addition, we have elected the practical expedients related to lease classification, hindsight, and land easement. We apply a single portfolio approach to account for the ROU assets and lease liabilities.
Goodwill and intangible assets
Goodwill is tested for impairment, at a minimum, on an annual basis at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The fair value of the reporting unit ismay be estimated using income and market approaches. The discounted cash flow method, a form of the income approach, uses expected future operating results and a market participant discount rate. The market approach uses comparable company prices and other relevant information generated by market transactions (either publicly traded entities or mergers and acquisitions) to develop pricing metrics to be applied to historical and expected future operating results of the reporting unit. Failure to achieve these expected results, changes in the discount rate, or market pricing metrics, may cause a future impairment of goodwill at the reporting unit level. We conducted our annual impairment test of goodwill as of August 31, 20192020 and 2018.2019. We determined that no adjustment to the carrying value of goodwill of our reporting unit was required. As of December 31, 2019,2020, we determined that no events occurred, or circumstances changed from August 31, 20192020 through December 31, 20192020 that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
Intangible assets consist of acquired customer-relatedcustomer list and user base intangible assets, marketing related intangibles, developed technology, and other intangible assets. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from one to eight years. No significant residual value is estimated for intangible assets.
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Impairment of long-lived assets
We evaluate long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future net discounted cash flow the asset is expected to generate.
Allowance for transaction losses and negative customer balances
We are exposed to transaction losses due to credit card and other payment misuse as well as nonperformance of and credit losses from sellers who accept payments through PayPal. We establish an allowance for estimated losses arising from completing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of goods or services, Automated Clearing House (“ACH”) returns,purchased items, buyer protection program claims, account takeovers, and account overdrafts.takeovers. This allowance represents an accumulation of the estimated amounts necessary to provide forof probable transaction losses incurred as of the reporting date, including those which we have not yet identified. The allowance is monitored regularly and is updated based on actual data received, including actual claims data reported by our claims processors. The allowance is 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.types, as applicable. Additions to the allowance are reflected as a component of transaction and loancredit losses inon our consolidated statements of income. At December 31, 2019 and 2018, theThe allowance for transaction losses totaled $136 million and $129 million, respectively, and was included in accrued expenses and other current liabilities inon our consolidated balance sheets.
Allowance for negative customer balances
Negative customer balances occur primarily when there are insufficient funds in a customer’s PayPal account to cover charges applied for ACHAutomated Clearing House returns, debit card transactions, and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of goods or services.purchased items, which are generally within the scope of our protection programs. Negative customer balances can be cured by the customer by adding funds to their account, receiving payments, or through back-up funding sources. We also utilize third-party collection agents. For negative customer balances that are not expected to be cured or otherwise collected, we provide an allowance for uncollectible accounts.expected losses. The allowance is estimatedrepresents expected losses based on known factshistorical trends involving collection and circumstances,write-off patterns, internal factors including our experience with similar cases, other known facts and circumstances, and reasonable and supportable macroeconomic forecasts, as applicable. Loss rates are derived using historical trends involving collectionloss data for each delinquency bucket using a roll rate model that captures the losses and the likelihood that a negative customer balance will be written-off as the delinquency age of such balance increases. The loss rates are then applied to the outstanding negative customer balances. Once the quantitative calculation is performed, we review the adequacy of the allowance and determine if qualitative adjustments need to be considered. We write-off patterns.negative customer balances in the month in which the balance becomes outstanding for 120 days. Write-offs that are recovered are recorded as a reduction to our allowance for negative customer balances. Negative customer balances are included in other current assets, net of the allowance on our consolidated balance sheets. Adjustments to the allowance for negative customer balances are recorded as a component of transaction and loancredit losses on our consolidated statements of income. The allowance for negative customer balances was $263 million and $215 million at December 31, 2019 and 2018, respectively.
Derivative instruments
See “Note 10—Derivative Instruments” for information related to the derivative instruments.
Fair value of financial instruments
Our financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from quoted prices for identical instruments in less active markets, readily available pricing sources for comparable instruments, or models using market observable inputs. As of December 31, 20192020 and 2018,2019, we did not have any assets or liabilities requiring measurement at fair value without observable market values that would require a high level of judgment to determine fair value (Level 3).
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Concentrations of risk
Our cash, cash equivalents, accounts receivable, loans and interest receivable, funds receivable and customer accounts, and long-term notes receivable are potentially subject to concentration of credit risk. Cash, cash equivalents, and customer accounts are placed with financial institutions that management believes are of high credit quality. In addition, funds receivable are generated primarily with financial institutions which management believes are of high credit quality. We invest our cash, cash equivalents, and customer accounts primarily in highly liquid, highly rated instruments which are uninsured. From time to time, we may also have corporate deposit balances with financial services institutions which exceed the FDIC insurance limit of $250,000. As part of our cash management process, we perform periodic evaluations of the relative credit standing of these financial institutions. Our accounts receivable are derived from revenue earned from customers located in the U.S. and internationally. Our loans and interest receivable are derived from merchant and consumer financing activities for customers located in the U.S. and internationally. Our long-term notes receivable is derived from the non-cash portion of the proceeds associated with the sale of our U.S. Consumer Credit Portfolio to Synchrony in 2018. As of December 31, 20192020 and 2018,2019, one customer accounted for 23%26% and 26%23% of net accounts receivables, respectively. No customer accounted for more than 10% of net loans receivable as of December 31, 20192020 and 2018.2019. At December 31, 20192020 and 2018,2019, one partner accounted for our long-term notes receivable balance, which represented 28% and 53%, respectively, of other assets. During the years ended December 31, 2020, 2019, 2018, and 2017,2018, no customer accounted for more than 10% of net revenues. During the years ended December 31, 2020, 2019, 2018, and 2017,2018, we earned approximately 14%13%, 17%14%, and 20%17% of revenue, respectively, from customers on eBay’s Marketplaces platform. No other source of revenue represented more than 10% of our revenue.
Revenue recognition
See “Note 2—Revenue” for information related to our revenue recognition.
Advertising expense
We expense the cost of producing advertisements at the time production occurs and expense the cost of communicating advertisements in the period during which the advertising space or airtime is used as sales and marketing expense. Online advertising expenses are recognized based on the terms of the individual agreements, which are generally over the greater of the ratio of the number of impressions delivered over the total number of contracted impressions, on a pay-per-click basis, or on a straight-line basis over the term of the contract. Advertising expense totaled $654 million, $399 million, $484 million, and $438$484 million for the years ended December 31, 2020, 2019, 2018, and 2017,2018, respectively.
Internal use software and website development costs
Direct costs incurred to develop software for internal use and website development costs, including those costs incurred in expanding and enhancing our Payments Platform, are capitalized and amortized generally over an estimated useful life of one to three years and are recorded as depreciation and amortization within the financial statement captions aligned with the internal organizations that are the primary beneficiaries of such assets. PayPal capitalized $314$347 million and $301$314 million of internally developed software and website development costs for the years ended December 31, 20192020 and 2018,2019, respectively. Amortization expense for these capitalized costs was $298$322 million, $262$298 million, and $262 million for the years ended December 31, 2020, 2019, 2018, and 2017,2018, respectively. Costs related to the maintenance of internal use software and website development costs are expensed as incurred.
Defined contribution savings plans
We have a defined contribution savings plan in the U.S. which qualifies under Section 401(k) of the Internal Revenue Code (the “Code”).Code. Our non-U.S. employees are covered by other savings plans. Expenses related to our defined contribution savings plans are recorded when services are rendered by our employees.
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Stock-based compensation
We determine compensation expense associated with restricted stock units, and performance based restricted stock units, and restricted stock awards based on the fair value of our common stock on the date of grant. We determine compensation expense associated with stock options based on the estimated grant date fair value method using the Black-Scholes valuation model. We generally recognize compensation expense using a straight-line amortization method over the respective vesting period for awards that are ultimately expected to vest. Accordingly, stock-based compensation expense for the years ended December 31, 2020, 2019, 2018, and 20172018 has been reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behavior of our employees as well as trends of actual forfeitures.
Foreign currency
Many of our foreign subsidiaries use the local currency of their respective countries as their functional currency. Assets and liabilities of our non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Revenues, costs, and expenses of our non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars using daily exchange rates. Gains and losses resulting from these translations are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”). Gains and losses from the remeasurement of foreign currency transactions into the functional currency are recognized as other income (expense), net in our consolidated statements of income.
Income taxes
We account for income taxes using an asset and liability approach which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on available evidence. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. We account for Global Intangible Low-Taxed Income (“GILTI”) as a current-period expense when incurred.
Other income (expense), net
Other income (expense), net includes: (i) interest income, which consists of interest earned on corporate cash and cash equivalents and short-term and long-term investments, (ii) interest expense, which consists of interest expenses, fees, and amortization of debt discount on our long-term debt and credit facilities, (iii) realized and unrealized gains (losses) on strategic investments, which includes changes in fair value related to our marketable equity securities and observable price changes on our non-marketable equity securities, and (iv) other, which primarily includes foreign currency exchange gains and losses due to remeasurement of certain foreign currency denominated monetary assets and liabilities, and fair value changes on the derivative contracts not designated as hedging instruments.
Recent Accounting Guidance
In 2016,2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This amended guidance provides transition relief for the accounting impact of reference rate reform. For a limited period, this guidance provides optional expedients and exceptions for applying GAAP to certain contract modifications, hedging relationships, and other transactions affected by a reference rate expected to be discontinued due to reference rate reform. The amended guidance is effective through December 31, 2022. Our exposure to London Interbank Offered Rate (“LIBOR”) is primarily limited to an insignificant portion of our available-for-sale debt securities and, accordingly, we do not expect reference rate reform to have a material impact on our consolidated financial statements.
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Recently Adopted Accounting Guidance
In 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This amended guidance simplifies certain aspects of accounting for income taxes. It is intended to remove certain exceptions to the general principles in GAAP, reduce the cost and complexity in accounting for income taxes, and improve financial statement preparers’ application of income tax-related guidance. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted. We early adopted this guidance in the first quarter of 2020. Adoption of this guidance did not have a material impact on our consolidated financial statements.
In 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update provided new guidance on the measurement of credit losses on financial instruments. CreditUnder the new guidance, credit losses on loans, trade and other receivables, held-to-maturity debt securities, and other instruments will reflect our estimate of the current expected credit losses and generally will result in the earlier recognition of allowances for credit losses. Credit losses on available-for-sale debt securities with unrealized losses will beare recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. Additional disclosures will beare required, including information used to track credit quality indicators by year of origination for most financing receivables for the past five years and to discuss the judgments made and methodologies used when implementing this new lifetime reserve framework. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.receivables. We adopted the new guidance effective January 1, 2020. We arewere required to apply the provisions of this guidance as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted with impairment of available-for-sale debt securities applied prospectively after adoption.
There are other new accounting pronouncements issued by the FASB that we have adopted or will adopt, as applicable, and weapplicable. We do not believe any of these accounting pronouncements have had, or will have, a material impact on our consolidated financial statements or disclosures.
PayPal enables its customers to send and receive payments. We earn revenue primarily by completing payment transactions for our customers on our Payments Platform and from other value added services. Our revenues are classified into two categories,categories: transaction revenues and revenues from other value added services.
We earn transaction revenues primarily from fees charged to merchants and consumers on a transaction basis. These fees may have a fixed and variable component. The variable component is generally a percentage of the value of the payment amount and is known at the time the transaction is processed. For a portion of our transactions, the variable component of the fee is eligible for reimbursement when the underlying transaction is approved for a refund. We estimate the amount of fee refunds that will be processed during theeach quarter and record a provision against our net revenues. The volume of activity processed on our Payments Platform, which results in transaction revenue, is referred to as Total Payment Volume (“TPV”). We define TPV as 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. We earn additional fees on transactions where we perform a 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.
Our contracts with our customers are usually open-ended and can be terminated by either party without a termination penalty after the notice period has lapsed. Therefore, our contracts are defined at the transaction level and do not extend beyond the service already provided. Our contracts generally renew automatically without any significant material rights. Some of our contracts include tiered pricing, based primarily on volume. The fee charged per transaction is adjusted up or down if the volume processed for a specified period is different from prior period defined volumes. We have concluded that this volume-based pricing approach does not constitute a future material right since the discount is within a range typically offered to a class of customers with similar volume. We do not have any capitalized contract costs, and do not carry any material contract balances.
Our primary service comprises a single performance obligation to complete payments on our Payments Platform for our customers. Using our risk assessment tools, we perform a transaction risk assessment on individual transactions to determine whether a transaction should be authorized for completion on our Payments Platform. When we authorize a transaction, we become obligated to our customer to complete the payment transaction.
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We recognize fees charged to our customers primarily on a gross basis as transaction revenue when we are the principal in respect of completing a payment transaction. As a principal to the transaction, we control the service of completing payments on our Payments Platform. We bear primary responsibility for the fulfillment of the payment service, contract directly with our customers, control the product specifications, and define the value proposal from our services. Further, we have full discretion in determining the fee charged to our customers, which is independent of the costs we incur in instances where we may utilize payment processors or other financial institutions to perform services on our behalf. We therefore bear full margin risk when completing a payment transaction. These fees paid to payment processors and other financial institutions are recognized as transaction expense. We are also responsible for providing customer support.
We provide merchants and consumers with protection programs on mostfor certain transactions completed on our Payments Platform, except for transactions using our gateway products or where our customer agreements specifically do not provide for protections.Platform. These programs are intended to protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our buyer protection program provides protection to consumers for qualifying purchases by reimbursing the consumer for the full amount of the purchase if athe purchased item doesis not arrivereceived or does not match the seller’s description. Our seller protection programs provide protection to merchants against claims that a transaction was not authorized by the buyer or claims that ana purchased item was not received by covering the seller for the full amount of the payment on eligible sales. These protection programs do not provide a separate service to our customers and we estimate and record associated costs in transaction and loancredit losses during the period the payment transaction is completed.
REVENUES FROM Other Value Added ServicesOTHER VALUE ADDED SERVICES
We earn revenues from other value added services, which is comprised primarily of revenue earned through partnerships, referral fees, subscription fees, gateway fees, and other services that we provide to our merchants and consumers. These contracts typically have 1 performance obligation which is provided and recognized over the term of the contract. The transaction price is generally fixed and known at the end of each reporting period; however, for some agreements, it may be necessary to estimate the transaction price using the expected value method. In our partnership agreement with Synchrony, in addition to the revenue share we earn, we also recognized revenue for transition servicing activities which we performed on their behalf through the second quarter of 2019 using a relative selling price determined through the adjusted market assessment approach. We record revenue earned in revenues from other value added services on a net basis when we are considered the agent with respect to processing transactions.
We also earn revenues from interest and fees earned primarily on our credit portfolio of loans receivable, and interest earned on certain PayPalassets underlying customer account balances. Interest and fees earned on the credit portfolio of loans receivable are computed and recognized based on the effective interest method and are presented net of any required reserves and amortization of deferred origination costs.
DISAGGREGATION OF REVENUE
We determine operating segments based on how our Chief Operating Decision Makerchief operating decision maker (“CODM”) manages the business, makes operating decisions around the allocation of resources, and evaluates operating performance. Our CODM is our Chief Executive Officer, who reviews our operating results on a consolidated basis. We operate inas 1 segment and have 1 reportable segment. Based on the information provided to and reviewed by our CODM, we believe that the nature, amount, timing, and uncertainty of our revenue and cash flows and how they are affected by economic factors are most appropriately depicted through our primary geographical markets and type of revenue categories (i.e., transaction(transaction revenues and revenues from other value added services.)services). Revenues recorded within these categories are earned from similar services for which the nature of associated fees and the related revenue recognition models are substantially the same.
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The following table presents our revenue disaggregated by primary geographical market and category:
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions) | |||||||||||
| Primary geographical markets | |||||||||||
| United States (“U.S.”) | $ | 9,417 | $ | 8,324 | $ | 7,084 | |||||
| United Kingdom (“U.K.”) | 1,872 | 1,658 | 1,402 | ||||||||
Other countries(1) | 6,483 | 5,469 | 4,608 | ||||||||
Total revenues(2) | $ | 17,772 | $ | 15,451 | $ | 13,094 | |||||
| Revenue category | |||||||||||
| Transaction revenues | $ | 16,099 | $ | 13,709 | $ | 11,501 | |||||
| Other value added services | 1,673 | 1,742 | 1,593 | ||||||||
Total revenues(2) | $ | 17,772 | $ | 15,451 | $ | 13,094 | |||||
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
| Primary geographical markets | |||||||||||||||||||||||||||||
| United States (“U.S.”) | $ | 11,013 | $ | 9,417 | $ | 8,324 | |||||||||||||||||||||||
| United Kingdom (“U.K.”) | 2,340 | 1,872 | 1,658 | ||||||||||||||||||||||||||
Other countries(1) | 8,101 | 6,483 | 5,469 | ||||||||||||||||||||||||||
Total revenues(2) | $ | 21,454 | $ | 17,772 | $ | 15,451 | |||||||||||||||||||||||
| Revenue category | |||||||||||||||||||||||||||||
| Transaction revenues | $ | 19,918 | $ | 16,099 | $ | 13,709 | |||||||||||||||||||||||
| Revenues from other value added services | 1,536 | 1,673 | 1,742 | ||||||||||||||||||||||||||
Total revenues(2) | $ | 21,454 | $ | 17,772 | $ | 15,451 | |||||||||||||||||||||||
(1) No single country included in the other countries category generated more than 10% of total revenue.
(2) Total revenues include $597 million, $1.1 billion $1.2 billion and $1.3$1.2 billion for the years ended December 31, 2020, 2019, 2018, and 2017,2018, respectively, which do not represent revenues recognized in the scope of Accounting Standards Codification Topic 606, Revenue from contracts with customers. Such revenues relate to interest, fees, and gains earned on loanloans and interest receivables, net and held for sale portfolio, as well as hedging gains or losses and interest earned on certain PayPalassets underlying customer balances.
Net revenues are attributed to the country in which the merchant is located, or in the case of a cross-border transaction, may be earned from the country in which the consumer and the merchant respectively reside. Net revenuesRevenues earned from other value added services are typically attributed to the country in which either the customer or partner reside.
Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive common shares.
The following table sets forth the computation of basic and diluted net income per share for the periods indicated:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (In millions, except per share amounts) | |||||||||||||||||
| Numerator: | |||||||||||||||||
| Net income | $ | 4,202 | $ | 2,459 | $ | 2,057 | |||||||||||
| Denominator: | |||||||||||||||||
Weighted average shares of common stock—basic | 1,173 | 1,174 | 1,184 | ||||||||||||||
| Dilutive effect of equity incentive awards | 14 | 14 | 19 | ||||||||||||||
Weighted average shares of common stock—diluted | 1,187 | 1,188 | 1,203 | ||||||||||||||
| Net income per share: | |||||||||||||||||
| Basic | $ | 3.58 | $ | 2.09 | $ | 1.74 | |||||||||||
| Diluted | $ | 3.54 | $ | 2.07 | $ | 1.71 | |||||||||||
| Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive | 1 | 2 | 1 | ||||||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (In millions, except per share amounts) | |||||||||||
| Numerator: | |||||||||||
| Net income | $ | 2,459 | $ | 2,057 | $ | 1,795 | |||||
| Denominator: | |||||||||||
Weighted average shares of common stock—basic | 1,174 | 1,184 | 1,203 | ||||||||
| Dilutive effect of equity incentive awards | 14 | 19 | 18 | ||||||||
Weighted average shares of common stock—diluted | 1,188 | 1,203 | 1,221 | ||||||||
| Net income per share: | |||||||||||
| Basic | $ | 2.09 | $ | 1.74 | $ | 1.49 | |||||
| Diluted | $ | 2.07 | $ | 1.71 | $ | 1.47 | |||||
| Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive | 2 | 1 | 2 | ||||||||
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During the year ended December 31, 2020, we completed 1 acquisition reflecting 100% of the equity interests of the acquired company, for a purchase price of $3.6 billion.
Honey Science Corporation
We completed our acquisition of Honey Science Corporation (“Honey”) in January 2020 by acquiring all outstanding shares for total consideration of approximately $4.0 billion, consisting of 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.
The following table summarizes the final allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:
| (In millions) | |||||
| Goodwill | $ | 2,962 | |||
| Customer lists and user base | 115 | ||||
| Marketing related | 30 | ||||
| Developed technology | 572 | ||||
| Total intangibles | $ | 717 | |||
| Accounts receivable, net | 50 | ||||
| Deferred tax liabilities, net | (58) | ||||
| Other net liabilities | (36) | ||||
| Total purchase price | $ | 3,635 | |||
The intangible assets acquired consist primarily of customer contracts, trade name/trademarks, and developed technology with estimated useful lives of three years. The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, and is attributable to the workforce of Honey and the synergies expected to arise from the acquisition through continued customer acquisition, cross selling initiatives, and product enhancements. Goodwill was not considered deductible for income tax purposes.
In association with the acquisition, we assumed restricted stock, restricted stock units, and options with an approximate grant date fair value of $400 million, which represents post business combination expense. The equity granted is a combination of shares issued to certain former Honey employees subject to a holdback arrangement and assumed Honey employee grants, which vest over a period of up to four years and are subject to continued employment.
We have included the financial results of the acquired business in our consolidated financial statements from the date of acquisition. Revenues and expenses related to the acquisition and pro forma results of operations have not been presented for the year ended December 31, 2020 because the effects of this acquisition were not material to our overall operations.
ACQUISITIONS COMPLETED IN 2019
There were 0 acquisitions accounted for as business combinations or divestitures completed in 2019.
ACQUISITIONS COMPLETED IN 2018
During the year ended December 31, 2018, we completed 4 acquisitions reflecting 100% of the equity interests of the acquired companies, for an aggregate purchase price of $2.7 billion.
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Hyperwallet
We completed the acquisition of HWLT Holdings Inc. (“Hyperwallet”) in November 2018 by acquiring all outstanding shares for a total purchase price of approximately $400 million, consisting of cash consideration. We acquired Hyperwallet to enhance our payout capabilities and improve our ability to provide an integrated suite of payment solutions to e-commerce platforms and marketplaces around the world. The allocation of purchase consideration resulted in approximately $100 million of customer-related intangible assets, approximately $30 million of developed technology intangible assets, and approximately $2 million of marketing related intangible assets with estimated useful lives ranging from 3three to 7seven years, funds receivable and customer accounts of $412 million, funds payable and amounts due to customers of $412 million, net liabilities of approximately $32 million, and goodwill of approximately $300 million, which is attributable to the workforce of Hyperwallet and the synergies expected to arise from the acquisition. We doGoodwill was not expect goodwill to beconsidered deductible for income tax purposes.
iZettle
We completed the acquisition of iZettle AB (publ) (“iZettle”) in September 2018 by acquiring all outstanding shares for a total purchase price of $2.2 billion, consisting of cash consideration paid of approximately $2.1 billion (net of cash acquired of $103 million) and restricted shares of PayPal with a fair value of approximately $22 million. We acquired iZettle to expand our in-store presence and strengthen our Payments Platform to help small businesses around the world grow and thrive in an omnichannel retail environment.
The following table summarizes the final allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:
| (In millions) | |||||
| Goodwill | $ | 1,600 | |||
| Customer lists and user base | 426 | ||||
| Marketing related | 102 | ||||
| Developed technology | 121 | ||||
| All other | 1 | ||||
| Total intangibles | $ | 650 | |||
| Cash | 103 | ||||
| Funds receivable and customer accounts | 47 | ||||
| Funds payable and amounts due to customers | (47) | ||||
| Deferred tax liabilities, net | (116) | ||||
| Other net liabilities | (55) | ||||
| Total purchase price | $ | 2,182 | |||
| (In millions) | |||
| Goodwill | $ | 1,600 | |
| Customer lists and user base | 426 | ||
| Marketing related | 102 | ||
| Developed technology | 121 | ||
| All other | 1 | ||
| Total intangibles | $ | 650 | |
| Cash | 103 | ||
| Funds receivable and customer accounts | 47 | ||
| Funds payable and amounts due to customers | (47 | ) | |
| Deferred tax liabilities, net | (116 | ) | |
| Other net liabilities | (55 | ) | |
| Total purchase consideration | $ | 2,182 | |
The intangible assets acquired consist primarily of merchant relationships, trade name/trademarks, developed technology, and existing acquirer relationships with estimated useful lives ranging from 3three to 7seven years. The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, which is attributable to the workforce of iZettle and the synergies expected to arise from the acquisition. We doGoodwill was not expect goodwill to beconsidered deductible for income tax purposes.
Simility
We completed the acquisition of Simility, Inc. (“Simility”) in July 2018 by acquiring all outstanding shares for a total purchase price of $107 million, consisting of cash consideration. We acquired Simility to enhance our ability to deliver fraud prevention and risk management solutions to merchants globally. The allocation of purchase consideration resulted in approximately $18 million of developed technology intangible assets with an estimated useful life of 3three years, net assets of approximately $10 million, and goodwill of approximately $79 million, which is attributable to the workforce of Simility and the synergies expected to arise from the acquisition. We doGoodwill was not expect goodwill to beconsidered deductible for income tax purposes.
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Other Acquisitions
In May 2018, we completed an acquisition which was accounted for as a business combination. The total purchase price for this acquisition was $16 million, consisting of cash consideration. The allocation of purchase consideration resulted in approximately $13 million of developed technology intangible assets with an estimated useful life of 2two years, net liabilities of $1 million, and goodwill of approximately $4 million, which is attributable to the workforce of the acquired company and the synergies expected to arise from the acquisition. We doGoodwill was not expect goodwill to beconsidered deductible for income tax purposes.
NOTE 5—GOODWILL AND INTANGIBLE ASSETS
The following table presents goodwill balances and adjustments to those balances for the years ended December 31, 20192020 and 2018:2019:
| December 31, 2018 | Goodwill Acquired | Adjustments | December 31, 2019 | Goodwill Acquired | Adjustments | December 31, 2020 | |||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||||||||
| Total goodwill | $ | 6,284 | $ | 0 | $ | (72) | $ | 6,212 | $ | 2,962 | $ | (39) | $ | 9,135 | |||||||||||||||||||||||||||
| December 31, 2017 | Goodwill Acquired | Adjustments | December 31, 2018 | Goodwill Acquired | Adjustments | December 31, 2019 | |||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||
| Total goodwill | $ | 4,339 | $ | 1,981 | $ | (36 | ) | $ | 6,284 | $ | — | $ | (72 | ) | $ | 6,212 | |||||||||||