UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2019~~March 31, 2020.



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition 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)

(408) 967-1000

(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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. o

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 ~~October 18, 2019,~~May 1, 2020, there were ~~1,174,192,449~~1,173,981,657 shares of the registrant’s common stock, $0.0001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.

PayPal Holdings, Inc.

TABLE OF CONTENTS



			Page Number
Part I.	Financial Information		4
	Item 1.	Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Income	5
		Condensed Consolidated Statements of Comprehensive Income	6
		Condensed Consolidated Statements of Stockholders’ Equity	7
		Condensed Consolidated Statements of Cash Flows	98
		Notes to Condensed Consolidated Financial Statements	109
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4140
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5554
	Item 4.	Controls and Procedures	5756
Part II.	Other Information		5857
	Item 1.	Legal Proceedings	5857
	Item 1A.	Risk Factors	5857
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6861
	Item 3.	Defaults Upon Senior Securities	6861
	Item 4.	Mine Safety Disclosures	6861
	Item 5.	Other Information	6861
	Item 6.	Exhibits	6962
Signatures			7064

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

PayPal Holdings, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(In millions, except par value)						(In millions, except par value)
	(Unaudited)						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	6,877		$	7,575		$	7,854		$	7,349
Short-term investments	3,585			1,534			2,332			3,412
Accounts receivable, net	417			313			412			435
Loans and interest receivable, net of allowances of $243 and $172 as of September 30, 2019 and December 31, 2018, respectively	3,477			2,532
Loans and interest receivable, net of allowances of $754 and $258 as of March 31, 2020 and December 31, 2019, respectively							3,712			3,972
Funds receivable and customer accounts	22,511			20,062			22,817			22,527
Prepaid expenses and other current assets	881			947			1,057			800
Total current assets	37,748			32,963			38,184			38,495
Long-term investments	2,771			971			2,366			2,863
Property and equipment, net	1,701			1,724			1,646			1,693
Goodwill	6,178			6,284			9,124			6,212
Intangible assets, net	629			825			1,369			778
Other assets	1,196			565			1,577			1,292
Total assets	$	50,223		$	43,332		$	54,266		$	51,333
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	193		$	281		$	217		$	232
Short-term debt	—			1,998
Funds payable and amounts due to customers	24,011			21,562			24,817			24,527
Accrued expenses and other current liabilities	2,038			2,002			2,276			2,087
Income taxes payable	98			61			139			73
Total current liabilities	26,340			25,904			27,449			26,919
Deferred tax liability and other long-term liabilities	2,436			2,042			2,839			2,520
Long-term debt	4,964			—			7,967			4,965
Total liabilities	33,740			27,946			38,255			34,404
Commitments and Contingencies (Note 13)
Equity:
Common stock, $0.0001 par value; 4,000 shares authorized; 1,174 shares outstanding as of both September 30, 2019 and December 31, 2018	—			—
Common stock, $0.0001 par value; 4,000 shares authorized; 1,173 shares outstanding as of both March 31, 2020 and December 31, 2019							—			—
Preferred stock, $0.0001 par value; 100 shares authorized, unissued	—			—			—			—
Treasury stock at cost, 102 and 91 shares as of September 30, 2019 and December 31, 2018, respectively	(6,566		)	(5,511		)
Treasury stock at cost, 113 and 105 shares as of March 31, 2020 and December 31, 2019, respectively							(7,672		)	(6,872		)
Additional paid-in-capital	15,266			14,939			15,501			15,588
Retained earnings	7,835			5,880			8,258			8,342
Accumulated other comprehensive income (loss)	(52		)	78			(120		)	(173		)
Total PayPal Stockholders’ equity							15,967			16,885
Noncontrolling interest							44			44
Total equity	16,483			15,386			16,011			16,929
Total liabilities and equity	$	50,223		$	43,332		$	54,266		$	51,333

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

PayPal Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2019			2018		2019		2018		2020			2019
	(In millions, except per share data)									(In millions, except per share data)
	(Unaudited)									(Unaudited)
Net revenues	$	4,378		$	3,683	$	12,811	$	11,225	$	4,618		$	4,128
Operating expenses:
Transaction expense	1,701			1,366		4,877		4,003		1,739			1,549
Transaction and loan losses	340			295		999		934
Transaction and credit losses										591			341
Customer support and operations	390			350		1,177		1,030		399			388
Sales and marketing	316			325		1,001		913		371			329
Technology and development	533			452		1,527		1,341		605			511
General and administrative	401			377		1,239		1,111		486			419
Restructuring and other charges	—			28		71		297		29			73
Total operating expenses	3,681			3,193		10,891		9,629		4,220			3,610
Operating income	697			490		1,920		1,596		398			518
Other income (expense), net	(213		)	43		224		94		(135		)	199
Income before income taxes	484			533		2,144		1,690		263			717
Income tax expense	22			97		192		217		179			50
Net income	$	462		$	436	$	1,952	$	1,473	$	84		$	667

Net income per share:
Basic	$	0.39		$	0.37	$	1.66	$	1.24	$	0.07		$	0.57
Diluted	$	0.39		$	0.36	$	1.64	$	1.22	$	0.07		$	0.56

Weighted average shares:
Basic	1,175			1,181		1,174		1,187		1,173			1,171
Diluted	1,188			1,199		1,188		1,206		1,185			1,188

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

PayPal Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(In millions)
(Unaudited)
Net income $ 462
$ 436
$ 1,952
$ 1,473
Other comprehensive income (loss), net of reclassification adjustments:
Foreign currency translation (90 ) (6 ) (148 ) (33 )
Unrealized (losses) gains on investments, net (5 ) 4
16
(6 )
Tax benefit (expense) on unrealized (losses) gains on investments, net 1
(1 ) (5 ) 2
Unrealized gains on hedging activities, net 71
34
7
249
Tax expense on unrealized gains on hedging activities, net (1 ) (1 ) —
(4 )
Other comprehensive income (loss), net of tax (24 ) 30
(130 ) 208
Comprehensive income $ 438
$ 466
$ 1,822
$ 1,681



	Three Months Ended March 31,
	2020			2019
	(In millions)
	(Unaudited)
Net income	$	84		$	667
Other comprehensive income (loss), net of reclassification adjustments:
Foreign currency translation adjustments (“CTA”)	(171		)	(67		)
Net investment hedge CTA gain	71			—
Unrealized gains (losses) on cash flow hedges, net	144			(46		)
Tax (expense) benefit on unrealized gains (losses) on cash flow hedges, net	(2		)	1
Unrealized gains on investments, net	15			11
Tax expense on unrealized gains on investments, net	(4		)	(2		)
Other comprehensive income (loss), net of tax	53			(103		)
Comprehensive income	$	137		$	564

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

PayPal Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Common Stock Shares		Treasury Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total 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		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)
	(Unaudited)																(Unaudited)
Balances at December 31, 2018	1,174		$	(5,511	)	$	14,939		$	78		$	5,880	$	15,386
Adoption of lease accounting standard	—		—			—			—			3		3
Balances at December 31, 2019																	1,173		$	(6,872	)	$	15,588		$	(173	)	$	8,342		$	44	$	16,929
Adoption of current expected credit loss standard																	—		—			—			—			(168		)	—		(168		)
Net income	—		—			—			—			667		667			—		—			—			—			84			—		84
Foreign currency translation	—		—			—			(67		)	—		(67		)
Foreign CTA																	—		—			—			(171		)	—			—		(171		)
Net investment hedge CTA gain																	—		—			—			71			—			—		71
Unrealized gains on cash flow hedges, net																	—		—			—			144			—			—		144
Tax expense on unrealized gains on cash flow hedges, net																	—		—			—			(2		)	—			—		(2		)
Unrealized gains on investments, net	—		—			—			11			—		11			—		—			—			15			—			—		15
Tax expense on unrealized gains on investments, net	—		—			—			(2		)	—		(2		)	—		—			—			(4		)	—			—		(4		)
Unrealized losses on hedging activities, net	—		—			—			(46		)	—		(46		)
Tax benefit on unrealized losses on hedging activities, net	—		—			—			1			—		1
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes	6		—			(302		)	—			—		(302		)	8		—			(382		)	—			—			—		(382		)
Common stock repurchased	(8	)	(705		)	(45		)	—			—		(750		)	(8	)	(800		)	—			—			—			—		(800		)
Stock-based compensation	—		—			256			—			—		256			—		—			295			—			—			—		295
Balances at March 31, 2019	1,172		$	(6,216	)	$	14,848		$	(25	)	$	6,550	$	15,157
Net income	—		—			—			—			823		823
Foreign currency translation	—		—			—			9			—		9
Unrealized gains on investments, net	—		—			—			10			—		10
Tax expense on unrealized gains on investments, net	—		—			—			(4		)	—		(4		)
Unrealized losses on hedging activities, net	—		—			—			(18		)	—		(18		)
Tax benefit on unrealized losses on hedging activities, net	—		—			—			—			—		—
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes	5		��			(73		)	—			—		(73		)
Common stock repurchased	—		—			—			—			—		—
Stock-based compensation	—		—			235			—			—		235
Balances at June 30, 2019	1,177		$	(6,216	)	$	15,010		$	(28	)	$	7,373	$	16,139
Net income	—		—			—			—			462		462
Foreign currency translation	—		—			—			(90		)	—		(90		)
Unrealized losses on investments, net	—		—			—			(5		)	—		(5		)
Tax benefit on unrealized losses on investments, net	—		—			—			1			—		1
Unrealized gains on hedging activities, net	—		—			—			71			—		71
Tax expense on unrealized gains on hedging activities, net	—		—			—			(1		)	—		(1		)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes	—		—			(19		)	—			—		(19		)
Common stock repurchased	(3	)	(350		)	—			—			—		(350		)
Stock-based compensation	—		—			275			—			—		275
Balances at September 30, 2019	1,174		$	(6,566	)	$	15,266		$	(52	)	$	7,835	$	16,483
Balances at March 31, 2020																	1,173		$	(7,672	)	$	15,501		$	(120	)	$	8,258		$	44	$	16,011

~~Table of Contents~~

~~PayPal Holdings, Inc.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)~~


	Common Stock Shares		Treasury Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total 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		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)
	(Unaudited)																(Unaudited)
Balances at December 31, 2017	1,200		$	(2,001	)	$	14,314		$	(142	)	$	3,823	$	15,994
Balances at December 31, 2018																	1,174		$	(5,511	)	$	14,939		$	78		$	5,880	$	—	$	15,386
Adoption of lease accounting standard																	—		—			—			—			3		—		3
Net income	—		—			—			—			511		511			—		—			—			—			667		—		667
Foreign currency translation	—		—			—			2			—		2
Unrealized losses on investments, net	—		—			—			(15		)	—		(15		)
Tax benefit on unrealized losses on investments, net	—		—			—			4			—		4
Unrealized losses on hedging activities, net	—		—			—			(18		)	—		(18		)
Tax benefit on unrealized losses on hedging activities, net	—		—			—			—			—		—
Foreign CTA																	—		—			—			(67		)	—		—		(67		)
Unrealized losses on cash flow hedges, net																	—		—			—			(46		)	—		—		(46		)
Tax benefit on unrealized losses on cash flow hedges, net																	—		—			—			1			—		—		1
Unrealized gains on investments, net																	—		—			—			11			—		—		11
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	7		—			(226		)	—			—		(226		)	6		—			(302		)	—			—		—		(302		)
Common stock repurchased	(24	)	(1,810		)	(15		)	—			—		(1,825		)	(8	)	(705		)	(45		)	—			—		—		(750		)
Stock-based compensation	—		—			214			—			—		214			—		—			256			—			—		—		256
Balances at March 31, 2018	1,183		$	(3,811	)	$	14,287		$	(169	)	$	4,334	$	14,641
Net income	—		—			—			—			526		526
Foreign currency translation	—		—			—			(29		)	—		(29		)
Unrealized gains on investments, net	—		—			—			5			—		5
Tax expense on unrealized gains on investments, net	—		—			—			(1		)	—		(1		)
Unrealized gains on hedging activities, net	—		—			—			233			—		233
Tax expense on unrealized losses on hedging activities, net	—		—			—			(3		)	—		(3		)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes	7		—			(67		)	—			—		(67		)
Common stock repurchased	(6	)	(500		)	—			—			—		(500		)
Stock-based compensation	—		—			214			—			—		214
Balances at June 30, 2018	1,184		$	(4,311	)	$	14,434		$	36		$	4,860	$	15,019
Net income	—		—			—			—			436		436
Foreign currency translation	—		—			—			(6		)	—		(6		)
Unrealized gains on investments, net	—		—			—			4			—		4
Tax expense on unrealized gains on investments, net	—		—			—			(1		)	—		(1		)
Unrealized gains on hedging activities, net	—		—			—			34			—		34
Tax expense on unrealized losses on hedging activities, net	—		—			—			(1		)	—		(1		)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes	1		—			9			—			—		9
Common stock repurchased	(7	)	(600		)	—			—			—		(600		)
Stock-based compensation	—		—			221			—			—		221
Balances at September 30, 2018	1,178		$	(4,911	)	$	14,664		$	66		$	5,296	$	15,115
Balances at March 31, 2019																	1,172		$	(6,216	)	$	14,848		$	(25	)	$	6,550	$	—	$	15,157

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

PayPal Holdings, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2020			2019
	(In millions)						(In millions)
	(Unaudited)						(Unaudited)
Cash flows from operating activities:
Net income	$	1,952		$	1,473		$	84		$	667
Adjustments:
Transaction and loan losses	999			934
Transaction and credit losses							591			341
Depreciation and amortization	685			553			293			230
Stock-based compensation	736			623			283			247
Deferred income taxes	(122		)	(34		)	(79		)	74
Cost basis adjustments to loans and interest receivable held for sale	—			244
Unrealized gains on strategic investments	(170		)	(31		)
Unrealized losses (gains) on strategic investments							151			(180		)
Other	(130		)	(48		)	(32		)	(44		)
Changes in assets and liabilities:
Accounts receivable	(103		)	(133		)	77			(96		)
Changes in loans and interest receivable held for sale, net	4			1,407			—			4
Accounts payable	(51		)	5			(21		)	(3		)
Income taxes payable	(33		)	(21		)	51			14
Other assets and liabilities	(470		)	(623		)	106			(227		)
Net cash provided by operating activities	3,297			4,349			1,504			1,027
Cash flows from investing activities:
Purchases of property and equipment	(530		)	(599		)	(206		)	(218		)
Proceeds from sales of property and equipment	17			—			119			—
Changes in principal loans receivable, net	(1,111		)	3,573			(386		)	(357		)
Purchases of investments	(19,808		)	(15,641		)	(3,593		)	(8,138		)
Maturities and sales of investments	17,390			15,947			5,511			6,028
Acquisitions, net of cash and restricted cash acquired	—			(2,136		)	(3,612		)	—
Funds receivable	(1,292		)	(427		)	(401		)	(2,175		)
Net cash (used in) provided by investing activities	(5,334		)	717
Net cash used in investing activities							(2,568		)	(4,860		)
Cash flows from financing activities:
Proceeds from issuance of common stock	78			83			1			7
Purchases of treasury stock	(1,106		)	(2,925		)	(800		)	(756		)
Tax withholdings related to net share settlements of equity awards	(473		)	(392		)	(402		)	(309		)
Borrowings under financing arrangements	5,471			2,075			3,000			—
Repayments under financing arrangements	(2,509		)	(1,101		)
Funds payable and amounts due to customers	2,376			2,767			457			2,560
Other financing activities							(15		)	—
Net cash provided by financing activities	3,837			507			2,241			1,502
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(49		)	(89		)	(178		)	1
Net change in cash, cash equivalents, and restricted cash	1,751			5,484			999			(2,330		)
Cash, cash equivalents, and restricted cash at beginning of period	13,233			8,285			15,743			13,233
Cash, cash equivalents, and restricted cash at end of period	$	14,984		$	13,769		$	16,742		$	10,903

Supplemental cash flow disclosures:
Cash paid for interest	$	76		$	47		$	11		$	20
Cash paid for income taxes, net	$	220		$	228		$	30		$	22

The below table reconciles cash, cash equivalents, and restricted cash as reported in the condensed consolidated balance sheet to the total of the same amounts shown in the condensed consolidated statement of cash flows:
The below table reconciles cash, cash equivalents, and restricted cash as reported in the condensed consolidated balance sheets to the total of the same amounts shown in the condensed consolidated statements of cash flows:
Cash and cash equivalents	$	6,877		$	8,147		$	7,854		$	4,515
Short term investments	10			16			17			15
Funds receivable and customer accounts	8,097			5,606			8,871			6,373
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows	$	14,984		$	13,769
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows							$	16,742		$	10,903

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Overview and Summary of Significant Accounting Policies

Overview and Organization

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 ~~consumers~~merchants and ~~merchants~~consumers worldwide. PayPal is committed to democratizing financial services and empowering people and businesses to join and thrive in the global economy. Our goal is to enable our ~~consumers~~merchants and ~~merchants~~consumers to manage and move their money anywhere in the world, anytime, on any platform, and using any device. We also facilitate person-to-person 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 PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products and services, comprise our proprietary Payments Platform.

We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on important issues such as countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. Some of the laws and regulations to which we are subject were enacted recently, and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including the way laws and regulations are interpreted and implemented, as well as increased penalties and enforcement actions related to non-compliance, could have a material adverse impact on our business, results of operations, and financial condition. Therefore, we monitor these areas closely to design compliant solutions for our customers who depend on us.

Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The condensed 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 condensed consolidated balance sheets represents the equity interests not owned by PayPal and is recorded for consolidated entities we control and of which we own less than 100%. Noncontrolling interest is not presented separately on our condensed 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 condensed consolidated statements of income and our investment balance is included in long-term investments on our condensed 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 condensed consolidated statements of income. Our investment balance is included in long-term investments on our condensed consolidated balance sheets.

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 (the ~~“2018~~“2019 Form 10-K”) filed with the Securities and Exchange ~~Commission.~~Commission on February 6, 2020.

In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the condensed consolidated financial statements for interim periods. Certain amounts for prior years have been reclassified to conform to the financial statement presentation as of and for the three ~~and nine~~ months ended ~~September 30, 2019.~~

~~Reclassifications~~

Beginning with the first quarter of 2019, we reclassified certain operating expenses within the condensed consolidated statements of income. Prior period amounts have been reclassified to conform to this presentation. These changes have no impact on our previously reported consolidated net income for prior periods, including total operating expenses, financial position, or cash flows for any periods presented.March 31, 2020.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The classification changes relate primarily to the combination of costs incurred to develop and operate our Payments Platform into a new caption entitled technology and development. This new caption includes: (a) costs incurred in operating, maintaining, and enhancing our Payments Platform, including network and infrastructure costs, which were previously classified in the customer support and operations caption, and (b) costs incurred in developing new and improving existing products, which were previously classified in the product development caption on our condensed consolidated statements of income. In addition, we have eliminated the presentation of depreciation and amortization expense as a separate financial statement caption by reclassifying these expenses into financial statement captions aligned with the internal organizations that are the primary beneficiaries of the depreciation and amortization of such assets.(Unaudited)

~~The following tables present the effects of the changes on the presentation of these operating expenses to the previously reported condensed consolidated statements of income:~~

Three Months Ended September 30, 2018
(In millions)
As Previously Reported Adjustments Revised

Transaction expense $ 1,366
$ —
$ 1,366
Transaction and loan losses 295
—
295
Customer support and operations 367
(17 ) 350
Sales and marketing 326
(1 ) 325
Product development 269
(269 ) —
Technology and development —
452
452
General and administrative 354
23
377
Depreciation and amortization 188
(188 ) —
Restructuring and other charges 28
—
28
Total operating expenses $ 3,193
$ —
$ 3,193

Nine Months Ended September 30, 2018
(In millions)
As Previously Reported Adjustments Revised

Transaction expense $ 4,003
$ —
$ 4,003
Transaction and loan losses 934
—
934
Customer support and operations 1,075
(45 ) 1,030
Sales and marketing 924
(11 ) 913
Product development 782
(782 ) —
Technology and development —
1,341
1,341
General and administrative 1,061
50
1,111
Depreciation and amortization 553
(553 ) —
Restructuring and other charges 297
—
297
Total operating expenses $ 9,629
$ —
$ 9,629

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Use of Estimates

The preparation of condensed 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 condensed 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 ~~loan~~credit 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 impact of the novel coronavirus pandemic is obtained. Actual results could differ from these estimates and any such differences may be material to our financial statements.

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 government and agency securities and corporate debt securities with maturities exceeding one year, and our strategic investments. Government and agency securities and corporate debt securities are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits. Accrued interest receivable on available-for-sale debt securities totaled $45 million and $54 million, respectively, at March 31, 2020 and December 31, 2019 and is included in other current assets on our condensed consolidated balance sheets.

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 and 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 recorded in other income (expense), net on our condensed 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.

We assess whether an impairment loss on our non-marketable equity securities and an other-than-temporary impairment loss on our equity method investments 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-temporary for our equity method investments, we write down the investment to its fair value and record the corresponding charge through other income (expense), net in our condensed consolidated statements of income.

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 condensed 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. 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, considering changes to the rating of the security by rating agencies, implied yields versus benchmark yields, and the extent to which fair value is less than amortized cost, among other factors, we will estimate the present value of cash flows expected to be collected. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss 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 impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 products. In the U.S., we partner with an independent chartered financial institution that extends credit to merchants using our PPWC product or PPBL product and purchase the related receivables extended by the independent chartered financial institution.

For our international consumer credit products, we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. and loans in Germany through our Luxembourg banking subsidiary, and we extend working capital loans in Australia through an Australian subsidiary.

As part of our arrangement with the independent chartered financial institution in the U.S., we sell back a participation interest in the pool of merchant receivables. 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. The independent chartered financial institution 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 institution 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 interests for which control has been surrendered.

Loans, advances, and interest and fees receivable are reported at their outstanding balances, net of any participation interests sold and pro rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. 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.

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.

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 and thus, no longer record these receivables on our condensed 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 revenue from other value-added services on our condensed consolidated statements of income. See “Note 11—Loans and Interest Receivable” for additional information related to this arrangement.

Through the closing of the transaction with Synchrony, we continued to work with an independent chartered financial institution to extend credit to U.S. consumers using our PayPal Credit product. We purchased the related receivables extended by independent chartered financial institutions until July 2018. As part of the arrangements we had with the independent chartered financial institutions in the U.S., we sold back a participation interest in the pool of U.S. consumer receivables outstanding under PayPal Credit consumer accounts. For these arrangements, gains or losses on the sale of the participation interest were not material as the carrying amount of the participation interest sold approximated the fair value at time of transfer.

Allowance for loans and interest receivable

The allowance for loans and interest receivable represents our estimate of lifetime expected credit losses inherent in our portfolio of loans and interest receivables. Increases to the allowance for loans receivable are reflected as a component of transaction and credit losses on our condensed consolidated financial statements. Increases to the allowance for interest and fees receivable are reflected as a reduction of net revenues on our condensed 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 judgments.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The allowance for loans and interest receivable is primarily based on expectations of credit losses based on historical lifetime loss data as well as macroeconomic forecasts applied to the portfolio that is segmented by geographic region, delinquency, and vintage, among other factors. Loss curves are generated using historical loss data for each loan portfolio and are applied to segments of each portfolio, categorized by geographic region, first borrowing versus reuse, delinquency, credit rating and vintage, among other factors, 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 is most appropriate to the economic conditions applicable to a particular period. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our consumer and merchant receivables. Our consumer receivables, which are primarily revolving in nature, do not have a contractual term; however, the reasonable and supportable forecast period we have included in our projected loss rates based on externally sourced data is approximately seven years. Our merchant receivables vary in contractual term; however, the reasonable and supportable forecast period considered for projected loss rates is approximately 2.5 to 3.5 years, depending upon the product. The allowance for losses against the interest and fees receivable is determined primarily by applying loss curves to each portfolio by geography, delinquency and period of origination, among other factors.

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 ~~estimates.~~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, which were primarily driven by charge-offs, were recorded in restructuring and other charges on our consolidated statements of income.

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 liabilities and other long-term liabilities on our condensed 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 would require the asset to remain on the consolidated balance sheets throughout the term of the lease and the proceeds to be recognized as a financing obligation. As of ~~September 30, 2019,~~March 31, 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; 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. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

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. 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Allowance for transaction losses

We are exposed to transaction losses due to credit card and other payment misuse as well as nonperformance 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 of goods or services, buyer protection program claims, and account takeovers. This allowance represents an accumulation of the estimated amounts necessary to provide for 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, the mix of transaction and loss types, as well as macroeconomic factors, as applicable. Additions to the allowance are reflected as a component of transaction and credit losses on our condensed consolidated statements of income. At March 31, 2020 and December 31, 2019, the allowance for transaction losses totaled $120 million and $136 million, respectively, and was included in accrued expenses and other current liabilities on our condensed 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 ACH returns, debit card transactions, and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of goods or services, 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 lifetime expected losses. The allowance represents expected losses based on historical trends involving collection and write-off patterns, internal factors including our experience with similar cases, other known facts and circumstances, and reasonable and supportable macroeconomic forecasts, as necessary. Loss rates are derived using historical loss 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 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 condensed consolidated balance sheets. Adjustments to the allowance for negative customer balances are recorded as a component of transaction and credit losses on our condensed consolidated statements of income. The allowance for negative customer balances was $276 million and $263 million at March 31, 2020 and December 31, 2019, respectively.

Recent Accounting Guidance

In ~~2016,~~2020, the Financial Accounting Standards Board (“FASB”) issued amended guidance that 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 LIBOR is limited to an insignificant amount of fixed rate investment securities and, therefore, we do not expect the impact from reference rate reform to be material.

Recently Adopted Accounting Guidance

In 2019, the FASB issued amended guidance for simplifying certain aspects for the accounting for income taxes. This amended guidance is intended to remove certain exceptions to the general principles in current GAAP, reduce the cost and complexity in accounting for income taxes, and improve financial statement preparers’ application of income tax-related guidance. This guidance does not create new accounting requirements. 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 condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In 2016, the FASB issued new guidance on the measurement of credit losses on financial instruments. ~~Credit~~Under the new guidance, credit losses on loans, trade and other receivables, held-to-maturity debt securities, and other instruments ~~will~~ reflect our current estimate of the ~~current~~ expected credit losses and generally ~~will~~ result in the earlier recognition of allowances for losses. Credit losses on available-for-sale debt securities with unrealized losses ~~will be~~are recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. Additional disclosures ~~will be~~are required, including information used to track credit quality by year of origination for most financing receivables. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We will adopt the new guidance effective January 1, 2020. We are 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.

We are in the process of refining models, designing business processes and controls, performing parallel runs, and model validation testing. Based on the models developed, which incorporate forecasts of macroeconomic conditions, the overall impact of adoption of the Current Expected Credit Loss framework is estimated to be an approximate 65% to 85% increase in our allowance for loans and interest receivable as compared to the incurred loss model applied today. The largest drivers of this increase are the change to a lifetime reserve model at the time the asset is initially recorded as well as inclusion of macro-economic factors within the model. Although the timing of the recognition of losses may result in an increase in loan losses in a given period, this increased allowance is not expected to result in a change in our economic losses. Expected credit loss reserves related to our other financing receivables, available-for-sale debt securities, and other financial instruments are not expected to have a material impact on our consolidated financial statements. The extent of the actual impact of the adoption of this guidance at the effective date will depend on the amount and asset quality of our financial instruments, current and forecasted economic conditions at the time of adoption, and any further refinements made to our models.

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~~Recently Adopted Accounting Guidance~~

In 2016, the FASB issued new accounting guidance related to accounting for leases, which requires lessees to recognize lease assets and lease liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than 12 months. As we are not a lessor, other changes in the guidance applicable to lessors do not apply. Additionally, in 2018, the FASB issued codification and targeted improvements to this guidance effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We adopted the new guidance oneffective January 1, 2019, using a modified retrospective basis and applied the optional practical expedients related to the transition. We recorded $511 million for the ROU assets and $521 million for the lease liabilities associated with our operating leases upon adoption. The adoption of this guidance did not have a significant impact to our consolidated statements of earnings, stockholders’ equity, and cash flows.2020. For additional information, see ~~Note 6—“Leases.~~“Note 11—Loans and Interest Receivable.”

There are other new accounting pronouncements issued by the FASB that we have adopted or will adopt, as applicable, and we do not believe any of these accounting pronouncements have had, or will have, a material impact on our condensed consolidated financial statements or disclosures.

Note 2—Revenue

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.

Disaggregation of Revenue

We determine operating segments based on how our chief 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 (transaction revenues and other value added 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.

The following table presents our revenue disaggregated by primary geographical market and category:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
	(In millions)								(In millions)
Primary geographical markets
United States (“U.S.”)	$	2,327	$	1,962	$	6,811	$	6,135	$	2,469	$	2,187
United Kingdom (“U.K.”)	455		397		1,342		1,191		478		433
Other countries⁽¹⁾	1,596		1,324		4,658		3,899		1,671		1,508
Total revenues⁽²⁾	$	4,378	$	3,683	$	12,811	$	11,225	$	4,618	$	4,128

Revenue category
Transaction revenues	$	3,955	$	3,343	$	11,564	$	9,858	$	4,215	$	3,731
Other value added services	423		340		1,247		1,367		403		397
Total revenues⁽²⁾	$	4,378	$	3,683	$	12,811	$	11,225	$	4,618	$	4,128

⁽¹⁾No single country included in the other countries category generated more than 10% of total revenue.

⁽²⁾Total revenues include ~~$295~~$247 million and ~~$173~~$257 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and $828 million and $973 million for the nine months ended September 30, 2019 and 2018,~~ respectively, which do not represent revenues recognized in the scope of ~~ASC~~Accounting Standards Codification Topic 606, Revenue from contracts with customers. Such revenues relate to interest, fees, and gains earned on ~~loan~~loans and interest ~~receivables, net and held for sale portfolio,~~receivable, as well as hedging gains or losses, and interest earned on certain PayPal customer balances.

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 revenues earned from other value added services are typically attributed to the country in which either the customer or partner reside.

Note 3—Net Income Per Share

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 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:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
	(In millions, except per share amounts)								(In millions, except per share amounts)
Numerator:
Net income	$	462	$	436	$	1,952	$	1,473	$	84	$	667
Denominator:
Weighted average shares of common stock - basic	1,175		1,181		1,174		1,187		1,173		1,171
Dilutive effect of equity incentive awards	13		18		14		19		12		17
Weighted average shares of common stock - diluted	1,188		1,199		1,188		1,206		1,185		1,188
Net income per share:
Basic	$	0.39	$	0.37	$	1.66	$	1.24	$	0.07	$	0.57
Diluted	$	0.39	$	0.36	$	1.64	$	1.22	$	0.07	$	0.56
Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive	1		—		2		—		2		3

Note 4—Business Combinations

There were 0 acquisitions or divestitures completed during the nine months ended September 30, 2019. During the three and nine months ended September 30, 2018, we completed 2 and 3 acquisitions, respectively, reflecting 100% of the equity interests of the acquired companies, for an aggregate purchase price of $2.3 billion.

~~Significant Acquisitions Completed in 2018~~

~~Hyperwallet~~Honey Science Corporation

We completed ~~the~~our acquisition of ~~HWLT Holdings Inc.~~Honey Science Corporation (“~~Hyperwallet”~~Honey”) in ~~November 2018~~January 2020 by acquiring all outstanding shares for a total ~~purchase price~~consideration of approximately $4.0 billion, consisting of approximately $3.6 billion in cash and approximately $400 million ~~consisting~~in assumed restricted stock, restricted stock units, and options, subject to vesting conditions. We believe our acquisition of ~~cash consideration. We acquired Hyperwallet to~~Honey will enhance our ~~payout capabilities~~value proposition by allowing us to further simplify and ~~improve our ability to provide an integrated suite~~personalize shopping experiences for consumers while driving conversion and increasing consumer engagement and sales for merchants.

Table of ~~payment solutions to ecommerce platforms and marketplaces around~~Contents

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the ~~world. The~~preliminary allocation of the purchase consideration ~~resulted in approximately $100 million~~to the fair value of ~~customer-related~~the assets acquired and liabilities assumed:



	(In millions)
Goodwill	$	2,959
Customer lists and user base	115
Marketing related	30
Developed technology	572
Total intangibles	$	717
Accounts receivable, net	55
Deferred tax liabilities, net	(76		)
Other net liabilities	(18		)
Total purchase consideration	$	3,637

The intangible assets ~~approximately $30 million~~acquired consist primarily of customer contracts, trade name/trademarks, and developed technology ~~intangible assets, and approximately $2 million of marketing related intangible assets~~ with estimated useful lives ~~ranging from 3 to 7 years, funds receivable~~of three years. The excess of the purchase consideration over the fair value of net tangible and ~~customer accounts of $412 million, funds payable~~identifiable intangible assets acquired was recorded as goodwill, and ~~amounts due to customers of $412 million, net liabilities of approximately $32 million, and initial goodwill of approximately $300 million, which~~ is attributable to the workforce of ~~Hyperwallet~~Honey and the synergies expected to arise from the ~~acquisition.~~acquisition through continued customer acquisition, cross selling initiatives, and product enhancements. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.

~~Table~~In association with the acquisition, we assumed restricted stock, restricted stock units, and options with an approximate grant date fair value of ~~Contents~~

~~iZettle~~$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 ~~completed~~have included the financial results of the acquired business in our condensed consolidated financial statements from the date of acquisition. Revenues and expenses related to the acquisition for the three months ended March 31, 2020 were not material. Pro forma results of ~~iZettle AB (publ) (“iZettle”) in September 2018 by acquiring all outstanding shares for a total purchase price~~operations have not been presented because the effects 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 iZettlethis acquisition were not material 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.~~financial results.

~~The following table summarizes~~There were 0 acquisitions or divestitures completed during 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 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 3 to 7 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 do not expect goodwill to be 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 3 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 do not expect goodwill to be deductible for income tax purposes.three months ended March 31, 2019.

Note 5—Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances during the ~~nine~~three months ended ~~September 30, 2019:~~March 31, 2020:

December 31,
2018
Goodwill
Acquired
Adjustments September 30,
2019
(In millions)
Total goodwill $ 6,284
$ —
$ (106 ) $ 6,178



	December 31, 2019		Goodwill Acquired		Adjustments			March 31, 2020
	(In millions)
Total goodwill	$	6,212	$	2,959	$	(47	)	$	9,124

The goodwill acquired during the three months ended March 31, 2020 was associated with the acquisition of Honey. The adjustments to goodwill during the three months ended March 31, 2020 pertain to foreign currency translation adjustments.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~The adjustments to goodwill during the nine months ended September 30, 2019 are related to foreign currency translation adjustments.~~(Unaudited)

Intangible Assets

The components of identifiable intangible assets are as follows:


	September 30, 2019								December 31, 2018								March 31, 2020								December 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)
	(In millions, except years)																(In millions, except years)
Intangible assets:
Customer lists and user base	$	1,106	$	(680	)	$	426	7	$	1,134	$	(623	)	$	511	7	$	1,205	$	(713	)	$	492	6	$	1,114	$	(700	)	$	414	7
Marketing related	293		(230		)	63		3	301		(207		)	94		3	321		(247		)	74		3	294		(239		)	55		3
Developed technology	443		(324		)	119		3	453		(269		)	184		3	999		(388		)	611		3	445		(343		)	102		3
All other	245		(224		)	21		5	245		(209		)	36		5	433		(241		)	192		7	436		(229		)	207		7
Intangible assets, net	$	2,087	$	(1,458	)	$	629		$	2,133	$	(1,308	)	$	825		$	2,958	$	(1,589	)	$	1,369		$	2,289	$	(1,511	)	$	778

Amortization expense for intangible assets was ~~$52~~$114 million and ~~$34~~$57 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, respectively. Amortization expense for intangible assets was $160 million and $90 million for the nine months ended September 30, 2019 and 2018,~~ respectively.

Expected future intangible asset amortization as of ~~September 30, 2019~~March 31, 2020 was as follows (in millions):


Fiscal years:
Remaining 2019	$	49
2020	184
Remaining 2020			$	335
2021	132		398
2022	70		336
2023	70		98
2024			96
Thereafter	124		106
Total	$	629	$	1,369

Note 6—Leases

PayPal enters into various leases, which are primarily real estate operating leases. We use these properties for executive and administrative offices, data centers, product development offices, and customer service and operations centers. ~~Our~~Many leases ~~have remaining~~include one or more renewal or termination options. These options are not included in our determination of the lease terms of less than one year to eleven years, some of which include options to extend individual leases for up to five years, and some of which include options to terminate individual leases within one year.term at commencement unless it is reasonably certain the Company will exercise the 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.

While a majority of lease payments are based on the stated rate in the lease, some lease payments are subject to annual changes based on the Consumer Price Index or another referenced index. ~~While lease liabilities are not re-measured as a result~~In the event of changes to the relevant index, ~~such changes to these indices~~lease liabilities are not re-measured and instead are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. All of PayPal’s variable lease payments are based on an index or rate.

The short-term lease exemption has been adopted for all leases with a duration of less than 12 months.

PayPal’s lease portfolio contains a small number of subleases. A sublease situation can arise when currently leased real estate space is available and is surplus to operational requirements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The components of lease expense were as follows:


	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019			Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
	(In millions, except weighted-average figures)						(In millions)
Lease expense
Operating lease expense	$	33		$	99		$	38		$	34
Sublease income	(5		)	(9		)	(1		)	(2		)
Total lease expense cost	$	28		$	90		$	37		$	32

Other information:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	31		$	93		$	35		$	31
Right-of-use assets obtained in exchange for new operating lease liabilities	$	32		$	100		$	244		$	5

							Balance at March 31, 2020			Balance at December 31, 2019
							(In millions, except weighted-average figures)
Operating lease right-of-use assets							$	687		$	479
Other current lease liabilities							122			104
Operating lease liabilities							608			403
Total operating lease liabilities							730			507
Weighted-average remaining lease term—operating leases	6.0 years			6.0 years			7.3 years			5.8 years
Weighted-average discount rate—operating leases	5		%	5		%	4		%	5		%

Future minimum lease payments for our operating leases as of ~~September 30, 2019~~March 31, 2020 were as follows:


	Operating Leases			Operating Leases
Fiscal years:	(In millions)			(In millions)
Remaining 2019	$	32
2020	120
Remaining 2020				$	114
2021	97			139
2022	77			107
2023	58			94
2024				86
Thereafter	216			300
Total	$	600		$	840
Less: present value discount	(87		)	(110		)
Lease liability	$	513		$	730

Future minimum lease payments for our operating leases as of December 31, 2018, prior to the adoption of new lease guidance as described in Note 1—“Overview and Summary of Significant Accounting Policies,” were as follows:

Operating Leases
Fiscal years: (In millions)
2019 $ 124
2020 111
2021 96
2022 81
2023 63
Thereafter 189
Total minimum lease payments $ 664

Operating lease amounts include minimum lease payments under our non-cancelable operating leases 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.

In February 2020, we entered into a sale-leaseback arrangement as the seller-lessee for a data center as the buyer-lessor obtained control of the facility. We sold the data center and simultaneously entered into an operating lease agreement with the purchaser for the right to use the facility for 8 years. The Company received proceeds of approximately $119 million, net of selling costs, which resulted in a de minimis net gain on the sale transaction.

As of ~~September 30, 2019,~~March 31, 2020, we also have additional operating leases that have not yet commenced, primarily for real estate and data centers, with minimum lease payments aggregating to ~~$111.5~~$151 million. These operating leases will commence between fiscal years ~~2019~~2020 and 2021 with lease terms of ~~one year~~3 years to ~~seven~~10 years.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7—Other Financial Statement Details

Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended ~~September 30, 2019:~~March 31, 2020:


	Unrealized Gains (Losses) on Cash Flow Hedges		Unrealized Gains (Losses) on Investments			Foreign Currency Translation			Estimated Tax Benefit (Expense)			Total			Unrealized Gains (Losses) on Cash Flow Hedges		Unrealized Gains (Losses) on Investments		Foreign Currency Translation Adjustment (“CTA”)			Net InvestmentHedge CTA Gain (Loss)			Estimated Tax Benefit (Expense)			Total
	(In millions)														(In millions)
Beginning balance	$	118	$	8		$	(151	)	$	(3	)	$	(28	)	$	6	$	2	$	(150	)	$	(31	)	$	—		$	(173	)
Other comprehensive income (loss) before reclassifications	141		(6		)	(90		)	—			45			186		15		(171		)	71			(6		)	95
Less: Amount of gain (loss) reclassified from accumulated other comprehensive income	70		(1		)	—			—			69
Less: Amount of gain reclassified from accumulated other comprehensive income (“AOCI”)															42		—		—			—			—			42
Net current period other comprehensive income (loss)	71		(5		)	(90		)	—			(24		)	144		15		(171		)	71			(6		)	53
Ending balance	$	189	$	3		$	(241	)	$	(3	)	$	(52	)	$	150	$	17	$	(321	)	$	40		$	(6	)	$	(120	)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended ~~September 30, 2018:~~

Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains (Losses) on Investments Foreign
Currency
Translation Estimated Tax Benefit (Expense) Total
(In millions)
Beginning balance $ 104
$ (22 ) $ (52 ) $ 6
$ 36
Other comprehensive income (loss) before reclassifications 41
5
(6 ) (2 ) 38
Less: Amount of gain reclassified from accumulated other comprehensive income 7
1
—
—
8
Net current period other comprehensive income (loss) 34
4
(6 ) (2 ) 30
Ending balance $ 138
$ (18 ) $ (58 ) $ 4
$ 66

~~The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30,~~March 31, 2019:

Unrealized Gains (Losses) on Cash Flow Hedges Unrealized Gains (Losses) on Investments
Foreign
Currency
Translation
Estimated Tax Benefit (Expense) Total
(In millions)
Beginning balance $ 182
$ (13 ) $ (93 ) $ 2
$ 78
Other comprehensive income (loss) before reclassifications 187
15
(148 ) (5 ) 49
Less: Amount of gain (loss) reclassified from accumulated other comprehensive income 180
(1 ) —
—
179
Net current period other comprehensive income (loss) 7
16
(148 ) (5 ) (130 )
Ending balance $ 189
$ 3
$ (241 ) $ (3 ) $ (52 )

~~Table of Contents~~

~~The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30, 2018:~~


	Unrealized Gains (Losses) on Cash Flow Hedges			Unrealized Gains (Losses) on Investments			Foreign Currency Translation			Estimated Tax Benefit (Expense)			Total			Unrealized Gains (Losses) on Cash Flow Hedges			Unrealized Gains (Losses) on Investments			Foreign CTA			Estimated Tax Benefit (Expense)			Total
	(In millions)															(In millions)
Beginning balance	$	(111	)	$	(12	)	$	(25	)	$	6		$	(142	)	$	182		$	(13	)	$	(93	)	$	2		$	78
Other comprehensive income (loss) before reclassifications	183			(6		)	(33		)	(2		)	142			6			11			(67		)	(1		)	(51		)
Less: Amount of loss reclassified from accumulated other comprehensive income	(66		)	—			—			—			(66		)
Less: Amount of gain reclassified from AOCI																52			—			—			—			52
Net current period other comprehensive income (loss)	249			(6		)	(33		)	(2		)	208			(46		)	11			(67		)	(1		)	(103		)
Ending balance	$	138		$	(18	)	$	(58	)	$	4		$	66		$	136		$	(2	)	$	(160	)	$	1		$	(25	)

The following table provides details about reclassifications out of ~~reclassifications from accumulated other comprehensive income (loss)~~AOCI for the ~~three months ended September 30, 2019 and 2018:~~periods presented below:

Details of Accumulated Other Comprehensive
Income (Loss) Components Amount of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Statement of Income
Three Months Ended September 30,
2019 2018
(In millions)
Gains on cash flow hedges—foreign exchange contracts
$ 70
$ 7
Net revenues
Unrealized (losses) gains on investments (1 ) 1
Other income (expense), net
$ 69
$ 8
Income before income taxes
—
—
Income tax expense
Total reclassifications for the period $ 69
$ 8
Net income

~~The following table provides details of reclassifications from accumulated other comprehensive income (loss) for the nine months ended September 30, 2019 and 2018:~~

Details of Accumulated Other Comprehensive
Income (Loss) Components Amount of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Statement of Income
Nine Months Ended September 30,
2019 2018
(In millions)
Gains (losses) on cash flow hedges—foreign exchange contracts
$ 180
$ (66 ) Net revenues
Unrealized (losses) gains on investments (1 ) —
Other income (expense), net
$ 179
$ (66 ) Income before income taxes
—
—
Income tax expense
Total reclassifications for the period $ 179
$ (66 ) Net income



Details about AOCI Components	Amount of Gains (Losses) Reclassified from AOCI				Affected Line Item in the Statement of Income
	Three Months Ended March 31,
	2020		2019
	(In millions)
Gains on cash flow hedges—foreign exchange contracts	$	42	$	52	Net revenues
Unrealized (losses) gains on investments	—		—		Other income (expense), net
	$	42	$	52	Income before income taxes
	—		—		Income tax expense
Total reclassifications for the period	$	42	$	52	Net income

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other Income (Expense), Net

The following table reconciles the components of other income (expense), net for the ~~three and nine months ended September 30, 2019 and 2018:~~periods presented below:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
	(In millions)												(In millions)
Interest income	$	47		$	61		$	144		$	116		$	33		$	49
Interest expense	(29		)	(22		)	(78		)	(57		)	(37		)	(22		)
Gains (losses) on strategic investments	(228		)	—			170			31			(124		)	180
Other	(3		)	4			(12		)	4			(7		)	(8		)
Other income (expense), net	$	(213	)	$	43		$	224		$	94		$	(135	)	$	199

Note 8—Funds Receivable and Customer Accounts and Investments

The following table summarizes the assets underlying our funds receivable and customer accounts, short-term investments, and long-term investments as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(In millions)				(In millions)
Funds receivable and customer accounts:
Cash and cash equivalents	$	8,097	$	5,642	$	8,871	$	8,387
Time deposits	469		389		552		514
Available-for-sale debt securities	9,502		10,940		9,614		10,190
Funds receivable	4,443		3,091		3,780		3,436
Total funds receivable and customer accounts	$	22,511	$	20,062	$	22,817	$	22,527
Short-term investments:
Time deposits	$	761	$	774	$	204	$	614
Available-for-sale debt securities	2,757		685		2,060		2,734
Restricted cash	67		75		68		64
Total short-term investments	$	3,585	$	1,534	$	2,332	$	3,412
Long-term investments:
Available-for-sale debt securities	$	983	$	676	$	661	$	1,025
Restricted cash	—		2		6		—
Strategic investments	1,788		293		1,699		1,838
Total long-term investments	$	2,771	$	971	$	2,366	$	2,863

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments was as follows:


	September 30, 2019								March 31, 2020
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In millions)								(In millions)
Funds receivable and customer accounts:
U.S. government and agency securities	$	5,359	$	2	$	—	$	5,361	$	4,793	$	28	$	—		$	4,821
Foreign government and agency securities	770		—		—		770		1,757		4		(1		)	1,760
Corporate debt securities	1,143		—		—		1,143		1,754		—		(4		)	1,750
Short-term investments:
U.S. government and agency securities	155		—		—		155		50		—		—			50
Foreign government and agency securities	379		—		—		379		258		—		—			258
Corporate debt securities	2,098		—		—		2,098		1,390		2		(5		)	1,387
Long-term investments:
U.S. government and agency securities	140		—		—		140		100		—		—			100
Foreign government and agency securities	252		—		—		252		125		1		—			126
Corporate debt securities	590		1		—		591		443		—		(8		)	435
Total available-for-sale debt securities⁽¹⁾	$	10,886	$	3	$	—	$	10,889	$	10,670	$	35	$	(18	)	$	10,687

⁽¹⁾Excludes foreign currency denominated available-for-sale ~~investments~~debt securities accounted for under the fair value option. Refer to ~~Note~~“Note 9—“Fair Value Measurement of Assets and Liabilities.”


	December 31, 2018									December 31, 2019
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In millions)									(In millions)
Funds receivable and customer accounts:
U.S. government and agency securities	$	6,945	$	2	$	—		$	6,947	$	4,996	$	—	$	—	$	4,996
Foreign government and agency securities	772		—		(1		)	771		1,392		—		—		1,392
Corporate debt securities	883		—		—			883		2,112		—		—		2,112
Short-term investments:
Foreign government and agency securities										533		—		—		533
Corporate debt securities	393		—		(3		)	390		1,955		—		—		1,955
Long-term investments:
U.S. government and agency securities										140		—		—		140
Foreign government and agency securities	38		—		—			38		207		—		—		207
Corporate debt securities	639		—		(11		)	628		676		2		—		678
Total available-for-sale debt securities⁽¹⁾	$	9,670	$	2	$	(15	)	$	9,657	$	12,011	$	2	$	—	$	12,013

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the gross unrealized losses and estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments for which an allowance for credit losses has not been deemed necessary in the current period, aggregated by length of time those individual securities have been in a continuous loss position, was as follows:


	September 30, 2019													March 31, 2020⁽¹⁾
	Less than 12 months					12 months or longer				Total				Less than 12 months					12 months or longer				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(In millions)													(In millions)
Funds receivable and customer accounts:
U.S. government and agency securities	$	594	$	—	⁽¹⁾	$	—	$	—	$	594	$	—	$	500	$	—		$	—	$	—	$	500	$	—
Foreign government and agency securities	390		—			—		—		390		—		422		(1		)	—		—		422		(1		)
Corporate debt securities	240		—			7		—		247		—		769		(4		)	—		—		769		(4		)
Short-term investments:
Foreign government and agency securities	92		—			—		—		92		—		55		—			—		—		55		—
Corporate debt securities	380		—			100		—		480		—		759		(5		)	—		—		759		(5		)
Long-term investments:
U.S. government and agency securities	140		—			—		—		140		—
Foreign government and agency securities	160		—			—		—		160		—
Corporate debt securities	142		—			63		—		205		—		297		(8		)	3		—		300		(8		)
Total available-for-sale debt securities	$	2,138	$	—		$	170	$	—	$	2,308	$	—	$	2,802	$	(18	)	$	3	$	—	$	2,805	$	(18	)

⁽¹⁾“—” Denotes gross unrealized loss or fair value of less than $1 million in a given position.


	December 31, 2018																December 31, 2019⁽¹⁾
	Less than 12 months						12 months or longer					Total					Less than 12 months				12 months or longer				Total
	Fair Value		Gross Unrealized Losses				Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(In millions)																(In millions)
Funds receivable and customer accounts:
U.S. government and agency securities	$	2,419	$	—		⁽¹⁾	$	18	$	—		$	2,437	$	—		$	2,452	$	—	$	—	$	—	$	2,452	$	—
Foreign government and agency securities	295		—				49		(1		)	344		(1		)	563		—		30		—		593		—
Corporate debt securities	281		—				7		—			288		—			825		—		—		—		825		—
Short-term investments:
Foreign government and agency securities																	115		—		—		—		115		—
Corporate debt securities	57		—				333		(3		)	390		(3		)	424		—		—		—		424		—
Long-term investments:
U.S. government and agency securities																	100		—		—		—		100		—
Foreign government and agency securities	10		—				28		—			38		—			75		—		—		—		75		—
Corporate debt securities	94		(2		)		534		(9		)	628		(11		)	27		—		44		—		71		—
Total available-for-sale debt securities	$	3,156	$	(2	)		$	969	$	(13	)	$	4,125	$	(15	)	$	4,581	$	—	$	74	$	—	$	4,655	$	—

⁽¹⁾“—” Denotes gross unrealized loss or fair value of less than $1 million in a given position.

~~We believe the decline in value is due to temporary market conditions and expect to recover the entire amortized cost basis of the available-for-sale debt securities. We~~Unrealized losses have not been recognized into income as we neither intend to sell nor anticipate ~~the need~~that it is more likely than not that we will be required to sell the securities before recovery. The decline in fair value is due primarily to changes in market conditions, rather than credit losses. We will continue to monitor the performance of the investment portfolio and assess ~~market and interest rate risk when evaluating~~ whether ~~an other-than-temporary~~ impairment ~~exists.~~due to expected credit losses has occurred. Amounts reclassified to earnings from unrealized gains and losses were not material for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments classified by date of contractual maturity were as follows:


	September 30, 2019				March 31, 2020
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In millions)				(In millions)
One year or less	$	9,137	$	9,140	$	9,407	$	9,429
After one year through five years	1,745		1,745		1,260		1,255
After five years through ten years	4		4		3		3
Total	$	10,886	$	10,889	$	10,670	$	10,687

Strategic Investments

Our strategic investments include marketable equity securities, which are publicly traded, and non-marketable equity securities, which are investments in privately held companies. Our marketable equity securities have readily determinable fair values and are recorded as long-term investments on our condensed consolidated balance sheets at fair value with changes in fair value recorded in other income (expense), ~~net.~~net on our condensed consolidated statements of income. Marketable equity securities totaled $1.2 billion and $1.3 billion as of ~~September 30, 2019. We had 0 such securities as of~~March 31, 2020 and December 31, ~~2018.~~2019, respectively.

~~Non-marketable~~Our non-marketable equity securities are recorded in long-term investments on our condensed consolidated balance sheets. ~~Our~~As of March 31, 2020 and December 31, 2019, we had non-marketable equity securities of $28 million and $27 million, respectively, where we have the ability to exercise significant influence, but not control, over the investee and account for these equity securities using the equity method of accounting. The remaining non-marketable equity securities do not have a readily determinable fair value ~~therefore~~and we measure these equity investments at cost minus impairment, if any, and adjust 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, and our share of earnings or losses from investments accounted for using the equity method are recognized in other income (expense), net on our condensed consolidated statements of income. The carrying value of our non-marketable equity securities totaled ~~$501~~$548 million and ~~$293~~$524 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

Measurement Alternative Adjustments

The adjustments to the carrying value of our non-marketable equity securities accounted for under the Measurement Alternative in the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows:


	Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2020			2019
	(In millions)				(In millions)
Carrying amount, beginning of period	$	293	$	88	$	497		$	293
Adjustments related to non-marketable equity securities:
Additions, net of sales	75		73
Net (sales) additions⁽¹⁾					(9		)	19
Gross unrealized gains	133		31		45			57
Gross unrealized losses and impairments					(13		)	—
Carrying amount, end of period	$	501	$	192	$	520		$	369

⁽¹⁾Net (sales) additions includes additions from purchases and reductions due to sales of securities and reclassifications when Measurement Alternative no longer applies.

Cumulative gross unrealized gains and cumulative gross unrealized losses and impairment related to non-marketable equity securities accounted for under the Measurement Alternative held at ~~September 30, 2019~~March 31, 2020 were approximately ~~$224~~$257 million and $5$18 million, respectively. Cumulative gross unrealized gains and cumulative gross unrealized losses and impairment related to non-marketable equity securities accounted for under the Measurement Alternative held at December 31, ~~2018~~2019 were approximately ~~$91~~$230 million and $5 million, respectively.

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Gains (losses) on marketable and non-marketable equity securities, excluding those accounted for using the equity method

~~We recognized $228 million in net~~Net unrealized losses ~~and 0 unrealized gains or losses, respectively,~~recognized in the three months ended ~~September 30, 2019 and 2018~~March 31, 2020 related to marketable and non-marketable equity securities (excluding those accounted for using the equity method) held at ~~September 30, 2019 and September 30, 2018.~~March 31, 2020 were approximately $132 million. Net unrealized gains recognized in the ~~nine~~three months ended ~~September 30,~~March 31, 2019 ~~and 2018~~ related to marketable and non-marketable equity securities (excluding those accounted for using the equity method) held at ~~September 30,~~March 31, 2019 ~~and September 30, 2018 were~~was approximately ~~$170 million and $31 million, respectively.~~$180 million.

Note 9—Fair Value Measurement of Assets and Liabilities

Financial Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


	September 30, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)						(In millions)
Assets:
Cash and cash equivalents⁽¹⁾	$	1,943	$	—	$	1,943	$	1,238	$	—	$	1,238
Short-term investments⁽²⁾:
U.S. government and agency securities	155		—		155		50		—		50
Foreign government and agency securities	432		—		432		604		—		604
Corporate debt securities	2,170		—		2,170		1,406		—		1,406
Total short-term investments	$	2,757	$	—	$	2,757	$	2,060	$	—	$	2,060
Funds receivable and customer accounts⁽³⁾:
Cash and cash equivalents	2,300		—		2,300		916		—		916
U.S. government and agency securities	5,361		—		5,361		4,821		—		4,821
Foreign government and agency securities	2,560		—		2,560		2,804		—		2,804
Corporate debt securities	1,581		—		1,581		1,989		—		1,989
Total funds receivable and customer accounts	$	11,802	$	—	$	11,802	$	10,530	$	—	$	10,530
Derivatives	293		—		293		366		—		366
Long-term investments⁽⁴⁾:
Long-term investments^(2),(4):
U.S. government and agency securities	140		—		140		100		—		100
Foreign government and agency securities	252		—		252		126		—		126
Corporate debt securities	591		—		591		435		—		435
Marketable equity securities	1,287		1,287		—		1,151		1,151		—
Total long-term investments	$	2,270	$	1,287	$	983	$	1,812	$	1,151	$	661
Total financial assets	$	19,065	$	1,287	$	17,778	$	16,006	$	1,151	$	14,855
Liabilities:
Derivatives	$	69	$	—	$	69	$	209	$	—	$	209

⁽¹⁾Excludes cash of ~~$4.9~~$6.6 billion not measured and recorded at fair value.

⁽²⁾Excludes restricted cash of ~~$67~~$74 million and time deposits of ~~$761~~$204 million not measured and recorded at fair value.

⁽³⁾Excludes cash, time deposits, and funds receivable of ~~$10.7~~$12.3 billion underlying funds receivable and customer accounts not measured and recorded at fair value.

⁽⁴⁾Excludes non-marketable equity securities of ~~$501~~$548 million measured using the Measurement ~~Alternative.~~Alternative or equity method accounting.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	December 31, 2018		Significant Other Observable Inputs (Level 2)		December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)				(In millions)
Assets:
Cash and cash equivalents⁽¹⁾	$	3,678	$	3,678	$	2,835	$	—	$	2,835
Short-term investments⁽²⁾:
Foreign government and agency securities	235		235		757		—		757
Corporate debt securities	450		450		1,977		—		1,977
Total short-term investments	685		685		2,734		—		2,734
Funds receivable and customer accounts⁽³⁾:
Cash and cash equivalents	605		605		683		—		683
U.S. government and agency securities	6,946		6,946		4,996		—		4,996
Foreign government and agency securities	2,434		2,434		2,653		—		2,653
Corporate debt securities	1,560		1,560		2,541		—		2,541
Total funds receivable and customer accounts	11,545		11,545		10,873		—		10,873
Derivatives	320		320		135		—		135
Long-term investments^(2),(4):
Long-term investments⁽⁴⁾:
U.S. government and agency securities					140		—		140
Foreign government and agency securities	48		48		207		—		207
Corporate debt securities	628		628		678		—		678
Marketable equity securities					1,314		1,314		—
Total long-term investments	676		676		2,339		1,314		1,025
Total financial assets	$	16,904	$	16,904	$	18,916	$	1,314	$	17,602
Liabilities:
Derivatives	$	67	$	67	$	122	$	—	$	122

⁽¹⁾Excludes cash of ~~$3.9~~$4.5 billion not measured and recorded at fair value.

⁽²⁾Excludes restricted cash of ~~$77~~$64 million and time deposits of ~~$774~~$614 million not measured and recorded at fair value.

⁽³⁾Excludes cash, time deposits, and funds receivable of ~~$8.5~~$11.7 billion underlying funds receivable and customer accounts not measured and recorded at fair value.

⁽⁴⁾Excludes non-marketable equity ~~investments~~securities of ~~$293~~$524 million measured using the Measurement ~~Alternative.~~Alternative or equity method accounting.

Our marketable equity securities are valued using quoted prices for identical assets in active markets (Level 1). All other financial assets and liabilities are valued using quoted prices for identical instruments in less active markets, readily available pricing sources for comparable instruments, or models using market observable inputs (Level 2).

A majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as currency rates, interest rate yield curves, option volatility, and equity prices. Our derivative instruments are primarily short-term in nature, generally one month to one year in duration. Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months.

We did not have any transfers of financial instruments between valuation levels during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~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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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We elect to account for foreign currency denominated available-for-sale debt securities under the fair value option. Election of the fair value option allows us to recognize any gains and losses from fair value changes on such investments in other income (expense), net on the condensed consolidated statements of income to significantly reduce the accounting asymmetry that would otherwise arise when recognizing the corresponding foreign exchange gains and losses relating to customer liabilities. The following table summarizes the estimated fair value of our available-for-sale debt securities ~~included within funds receivable and customer accounts, short-term investments and long-term investments~~ under the fair value option as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(In millions)				(In millions)
Funds receivable and customer accounts	$	2,228	$	2,339	$	1,283	$	1,690
Short-term investments	$	125	$	295	$	365	$	246
Long-term investments	$	—	$	10

The following table summarizes the gains (losses) from fair value changes recognized in other income (expense), net related to the available-for-sale debt securities ~~included within funds receivable and customer accounts, short-term investments, and long-term investments~~ under the fair value option for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
	(In millions)												(In millions)
Funds receivable and customer accounts	$	(86	)	$	(18	)	$	(88	)	$	(87	)	$	(20	)	$	(29	)
Short-term investments	$	(4	)	$	(4	)	$	(8	)	$	(10	)	$	(18	)	$	—

Financial Assets and Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis

The following ~~table summarizes~~tables summarize our financial assets and liabilities held as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 for which a non-recurring fair value measurement was recorded during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and the year ended December 31, ~~2018:~~2019, respectively:

September 30, 2019 Significant Other
Observable Inputs
(Level 2)
(In millions)
Non-marketable equity investments measured using the Measurement Alternative⁽¹⁾
$ 307
307



	March 31, 2020		Significant Other Observable Inputs (Level 2)
	(In millions)
Non-marketable equity investments measured using the Measurement Alternative⁽¹⁾	$	128	$	128

⁽¹⁾Excludes non-marketable equity investments of $392 million accounted for under the Measurement Alternative for which no observable price changes occurred during the three months ended March 31, 2020.



	December 31, 2019		Significant Other Observable Inputs (Level 2)
	(In millions)
Non-marketable equity investments measured using the Measurement Alternative⁽¹⁾	$	303	$	303

⁽¹⁾Excludes non-marketable equity investments of $194 million accounted for ~~which no observable price changes occurred during~~under the ~~nine months ended September 30, 2019.~~

December 31, 2018 Significant Other
Observable Inputs
(Level 2)
(In millions)
Non-marketable equity investments measured using the Measurement Alternative⁽¹⁾
$ 116
116

⁽¹⁾~~Excludes non-marketable equity investments of $177 million~~Measurement Alternative for which no observable price changes occurred during the year ended December 31, ~~2018.~~2019.

We measured these non-marketable equity investments accounted for under the Measurement Alternative at cost minus impairment, if any, adjusted for observable price changes in orderly transactions for an identical or a similar investment in the same issuer.

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Financial Assets and Liabilities Not Measured and Recorded at Fair Value

Our financial instruments, including cash, restricted cash, time deposits, loans and interest receivable, net, certain customer accounts, notes receivable, and ~~short-term~~long-term debt related to borrowings on our credit facilities are carried at amortized cost, which approximates their fair value. Our fixed rate debt (also classified as long-term ~~debt~~debt) carried at amortized cost had a carrying value of approximately $5.0 billion and fair value of approximately $4.9 billion as of March 31, 2020. Our fixed rate debt carried at amortized cost had a carrying value and fair value of approximately $5.0 billion as of ~~September 30,~~December 31, 2019. If these financial instruments were measured at fair value in the financial statements, cash would be classified as Level 1; restricted cash, time deposits, certain customer accounts, ~~short-term debt,~~ and long-term debt would be classified as Level 2; and the remaining financial instruments would be classified as Level 3 in the fair value hierarchy.

Note 10—Derivative Instruments

Summary of Derivative Instruments

Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Our derivatives expose us to credit risk to the extent that our counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions and by entering into collateral security arrangements. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. We do not use any derivative instruments for trading or speculative purposes.

~~Foreign Currency Exchange Contracts~~Cash Flow Hedges

We transact business in various foreign currencies and have significant international revenues and costs denominated in foreign currencies, which subjects us to foreign currency risk. We have a foreign currency exposure management program whereby we designate certain foreign currency exchange contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues denominated in foreign currencies. The objective of the foreign currency exchange contracts is to help mitigate the risk that the U.S. dollar-equivalent cash flows are adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. These derivative instruments are designated as cash flow hedges and accordingly, the derivative’s gain or loss is initially reported as a component of ~~accumulated other comprehensive income (loss)~~AOCI and subsequently reclassified into revenue in the same period the forecasted transaction affects earnings. We evaluate the effectiveness of our foreign currency exchange contracts on a quarterly basis by comparing the critical terms of the derivative instruments with the critical terms of the forecasted cash flows of the hedged item; if the critical terms are the same, we conclude the hedge will be perfectly effective. We did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. We ~~do not use any foreign currency exchange contracts for trading or speculative purposes.~~report cash flows arising from derivative instruments consistent with the classification of cash flows from the underlying hedged items that these derivatives are hedging. Accordingly, the cash flows associated with derivatives designated as cash flow hedges are classified in cash flows from operating activities on our condensed consolidated statements of cash flows.

As of ~~September 30, 2019,~~March 31, 2020, we estimate that ~~$172~~$129 million of net derivative gains related to our cash flow hedges included in ~~accumulated other comprehensive income (loss) is~~AOCI are expected to be reclassified into earnings within the next 12 months. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ we did not discontinue any cash flow hedges because it was probable that the original forecasted transaction would not occur and as such, did not reclassify any gains or losses to earnings prior to the occurrence of the hedged transaction. If we elect to discontinue our cash flow hedges and it is probable that the original forecasted transaction will occur, we continue to report the ~~derivative's~~derivative’s gain or loss in ~~accumulated other comprehensive income (loss)~~AOCI until the forecasted transaction affects earnings, at which point we also reclassify it into earnings. Gains and losses on derivatives held after we discontinue our cash flow hedges and gains and losses on derivative instruments that are not designated as cash flow hedges are recorded in the same financial statement line item to which the derivative relates.

Net Investment Hedge

We use a forward foreign currency exchange contract to reduce the foreign currency exchange risk related to our investment in a foreign subsidiary. This derivative is designated as a net investment hedge and accordingly, the derivative’s gain and loss is recorded in AOCI as part of foreign currency translation. The accumulated gains and losses associated with this instrument will remain in AOCI until the foreign subsidiary is sold or substantially liquidated, at which point they will be reclassified into earnings. We did

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

not exclude any component of the changes in fair value of the derivative instrument from the assessment of hedge effectiveness. The cash flow associated with the derivative designated as a net investment hedge is classified in cash flows from investing activities on our condensed consolidated statements of cash flows.

During the three months ended March 31, 2020, we recognized $71 million in unrealized gains on our foreign currency exchange contract designated as a net investment hedge within the foreign currency translation section of other comprehensive income. During the three months ended March 31, 2019, we did 0t have a net investment hedge. We have ~~an additional~~0t reclassified any gains or losses from AOCI into earnings during any of the periods presented.

Foreign Currency Exchange Contracts Not Designated As Hedging Instruments

We have a foreign currency exposure management program whereby 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 foreign currency exchange rate movements on our assets and liabilities. The ~~foreign currency exchange~~ gains and losses ~~on our~~due to remeasurement of certain foreign currency denominated monetary assets and liabilities are recorded in other income (expense), net, which is offset by the gains and losses on ~~the~~these foreign currency exchange contracts.

~~Table~~ The cash flows associated with our non-designated derivatives that hedge foreign currency denominated monetary assets and liabilities are classified in cash flows from operating activities on our condensed consolidated statements of ~~Contents~~

cash flows.

Fair Value of Derivative Contracts

The fair value of our outstanding derivative instruments as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 was as follows:

Balance Sheet Location September 30,
2019 December 31,
2018
(In millions)
Derivative Assets:
Foreign exchange contracts designated as cash flow hedges Other current assets $ 172
$ 170
Foreign exchange contracts designated as cash flow hedges Other assets (non-current) 17
11
Foreign exchange contracts not designated as hedging instruments Other current assets 104
139
Total derivative assets $ 293
$ 320

Derivative Liabilities:
Foreign exchange contracts designated as cash flow hedges Other current liabilities $ —
$ 3
Foreign exchange contracts not designated as hedging instruments Other current liabilities 69
64
Total derivative liabilities $ 69
$ 67



	Balance Sheet Location	March 31, 2020		December 31, 2019
		(In millions)
Derivative Assets:
Foreign currency exchange contracts designated as hedging instruments	Other current assets	$	168	$	45
Foreign currency exchange contracts designated as hedging instruments	Other assets (non-current)	22		1
Foreign currency exchange contracts not designated as hedging instruments	Other current assets	176		89
Total derivative assets		$	366	$	135

Derivative Liabilities:
Foreign currency exchange contracts designated as hedging instruments	Other current liabilities	$	—	$	58
Foreign currency exchange contracts designated as hedging instruments	Other long-term liabilities	—		13
Foreign currency exchange contracts not designated as hedging instruments	Other current liabilities	209		51
Total derivative liabilities		$	209	$	122

Master Netting Agreements - Rights of Setoff

Under master netting agreements with respective counterparties to our foreign currency exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis inon our condensed consolidated balance sheets. Rights of setoff associated with our foreign currency exchange contracts represented a potential offset to both assets and liabilities by ~~$49~~$125 million as of ~~September 30, 2019~~March 31, 2020 and ~~$45~~$92 million as of December 31, ~~2018.~~2019. We have entered into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We posted $1$23 million and ~~nil~~$12 million in cash collateral related to our derivative liabilities as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, which is recognized in other current assets on our condensed consolidated balance sheets, and is related to the right to reclaim cash collateral. We received ~~$207~~$172 million and ~~$195~~$39 million in counterparty cash collateral related to our derivative assets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, which is recognized in other current liabilities on our condensed consolidated balance sheets, and is related to the obligation to

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

return cash collateral. ~~Additionally, as~~As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, we ~~received $4 million and $6 million, respectively, in~~did 0t receive or post any counterparty non-cash ~~collateral in the form of debt securities.~~collateral.

Effect of Derivative Contracts on Condensed Consolidated Statements of Income

The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments designated as hedging instruments:

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(In millions)
Net revenues
Total amounts presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded $ 4,378
$ 3,683
$ 12,811
$ 11,225
Gains (losses) on foreign exchange contracts designated as cash flow hedges reclassified from accumulated other comprehensive income $ 70
$ 7
$ 180
$ (66 )

~~Table of Contents~~



	Three Months Ended March 31,
	2020		2019
	(In millions)
	Net revenues
Total amounts presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded	$	4,618	$	4,128
Gains on foreign exchange contracts designated as cash flow hedges reclassified from AOCI	$	42	$	52

The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments not designated as hedging instruments:

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(In millions)
Gains (losses) on foreign exchange contracts recognized in other income (expense), net $ 31
$ 12
$ 30
$ 27
Gains (losses) on foreign exchange contracts recognized in net revenues —
4
—
5
Total gains (losses) recognized from foreign exchange contracts not designated as hedging instruments $ 31
$ 16
$ 30
$ 32



	Three Months Ended March 31,
	2020		2019
	(In millions)
Gains (losses) on foreign exchange contracts recognized in other income (expense), net	$	37	$	(10	)

Notional Amounts of Derivative Contracts

Derivative transactions are measured in terms of the notional amount; however, this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged, but is used only as the underlying basis on which the value of foreign currency exchange payments under these contracts is determined. The following table provides the notional amounts of our outstanding derivatives:


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(In millions)				(In millions)
Foreign exchange contracts designated as cash flow hedges	$	3,354	$	3,831
Foreign exchange contracts designated as hedging instruments					$	4,424	$	4,550
Foreign exchange contracts not designated as hedging instruments	13,736		10,703		12,372		17,131
Total	$	17,090	$	14,534	$	16,796	$	21,681

Note 11—Loans and Interest Receivable

We offer credit products to consumers and certain small and medium-sized merchants. We work with an independent chartered financial ~~institutions~~institution that ~~extend~~extends credit to ~~the consumer or merchant~~merchants using our credit products in the U.S. For our consumer credit products outside the U.S., we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. and working capital loans in Germany through our Luxembourg banking subsidiary, and extend working capital loans in Australia through an Australian subsidiary. Prior to July 2018, we purchased receivables related to credit extended to U.S. consumers by independent chartered financial institutions and were responsible for servicing functions related to that portfolio. Following the completion of the sale of our U.S. consumer credit receivables portfolio to Synchrony Bank in July 2018, we no longer purchased receivables related to the U.S. consumer loans, but remained responsible for the servicing functions related to the sold portfolio through a transition period which ended in the second quarter of 2019. We purchase receivables related to credit extended to U.S. merchants by anthe independent chartered financial institution and are responsible for servicing functions related to that portfolio. During the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ we purchased approximately $1.3 billion and $1.1 billion in merchant credit receivables, ~~of approximately $3.4 billion and $7.0 billion,~~ respectively. The credit receivables purchased during the nine months ended September 30, 2018 included purchases associated with our U.S. consumer credit receivables portfolio, which was designated as held for sale until the completion of sale to Synchrony Bank in July 2018.

Consumer Receivables

We offer credit products to consumers who choose PayPal Credit at checkout. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the outstanding balance of consumer receivables, which primarily consisted of revolving loans and interest receivable due from international consumer accounts, was ~~$1.0~~$1.4 billion and ~~$704 million,~~$1.3 billion, respectively.

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We closely monitor the credit quality ~~for~~of our consumer loan receivables to ~~manage~~evaluate and ~~evaluate~~manage our related exposure to credit risk. Credit risk management begins with initial underwriting and continues through to full repayment of a loan. To assess a consumer who requests a loan, we use, among other indicators, internally developed risk models using detailed information from external sources, such as credit bureaus where available, and internal historical experience, including the consumer’s prior repayment history with PayPal Credit ~~products as well as other measures.~~products. We use delinquency status and trends to assist in making new and ongoing credit decisions, to adjust our models, to plan our collection practices and strategies, and in our determination of our allowance for consumer loans and interest receivable.

Consumer Receivables Delinquency and Allowance

The following ~~tables present~~table presents the delinquency status ~~of the principal amount~~ of consumer loans and interest ~~receivable.~~receivable at March 31, 2020 and December 31 2019. Since our consumer loans are primarily revolving in nature, they are disclosed in the aggregate and not by year of origination. The amounts ~~shown below~~ are based on the number of days past the billing ~~date to the consumer. Current~~date. The “current” category represents balances that are within 3029 days of the billing ~~date.~~date:

September 30, 2019
(In millions)
Current 30 - 59 Days Past Due 60 - 89 Days Past Due 90 - 180 Days Past Due Total Past Due Total
$ 965
$ 31
$ 12
$ 22
$ 65
$ 1,030
93.7 % 3.0 % 1.2 % 2.1 % 6.3 % 100 %



	March 31, 2020				December 31, 2019
	Amortized Cost Basis Revolving		Percent		Amortized Cost Basis Revolving		Percent
	(In millions, except percentages)
Current	$	1,327	96.4	%	$	1,279	96.7	%
30-59 days	18		1.3	%	15		1.1	%
60-89 days	11		0.8	%	9		0.7	%
90-179 days	21		1.5	%	19		1.5	%
Total consumer loans and interest receivable⁽¹⁾	$	1,377	100.0	%	$	1,322	100.0	%

December 31, 2018
(In millions)
Current 30 - 59 Days Past Due 60 - 89 Days Past Due 90 - 180 Days Past Due Total Past Due Total
$ 668
$ 18
$ 6
$ 12
$ 36
$ 704
94.9 % 2.5 % 0.9 % 1.7 % 5.1 % 100 %

⁽¹⁾

~~We charge off~~Excludes receivables from other consumer ~~loan receivable balances in the month in which a customer's balance becomes 180 days past the payment due date. Bankrupt accounts are charged off within 90 days after receipt~~credit products of ~~notification of bankruptcy. Loans receivable past the payment due date continue to accrue interest until they are charged off. We record an allowance for loss against the interest receivable.~~$94 million and $92 million at March 31, 2020 and December 31, 2019, respectively.

The following table summarizes the activity in the allowance for consumer loans and interest receivable for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:


	September 30, 2019									September 30, 2018									March 31, 2020									March 31, 2019
	Consumer Loans Receivable			Interest Receivable			Total Allowance			Consumer Loans Receivable			Interest Receivable			Total Allowance⁽¹⁾			Consumer Loans Receivable			Interest Receivable			Total Allowance⁽¹⁾			Consumer Loans Receivable			Interest Receivable			Total Allowance⁽¹⁾
	(In millions)																		(In millions)
Beginning balance	$	27		$	3		$	30		$	57		$	6		$	63		$	49		$	8		$	57		$	27		$	3		$	30
Adjustment for adoption of credit losses accounting standard																			24			4			28			—			—			—
Provisions	18			6			24			50			9			59			98			20			118			1			2			3
Charge-offs	(31		)	(4		)	(35		)	(97		)	(12		)	(109		)	(21		)	(4		)	(25		)	(9		)	(1		)	(10		)
Recoveries⁽²⁾	25			—			25			12			—			12			9			—			9			10			—			10
Ending balance	$	39		$	5		$	44		$	22		$	3		$	25		$	159		$	28		$	187		$	29		$	4		$	33

^{(1) Beginning balance includes approximately $50 million of U.S.}Excludes allowances from other consumer credit ~~receivables that were fully reserved~~products of $10 million and ~~have been charged off as of September 30, 2018.~~$9 million at March 31, 2020 and March 31, 2019, respectively.

⁽²⁾The recoveries were primarily related to fully charged off U.S. consumer credit receivables not subject to the sale to ~~Synchrony Bank.~~Synchrony.

~~The tables above exclude receivables from other consumer credit products~~Changes to the provision for the three months ended March 31, 2020 were primarily attributable to changes in current and projected macroeconomic conditions resulting in an increase of ~~$99~~$90 million and ~~$96~~our portfolio growth resulting in an increase of $10 million, ~~at September 30, 2019 and December~~both of which are used in estimating our expected credit losses. Changes to the charge-offs for the three months ended March 31, ~~2018, respectively, and allowances of $11 million and $12 million at September 30, 2019 and December 31, 2018, respectively.~~

~~Table of Contents~~

2020 were primarily attributable to the growth in our portfolio.

The provision for ~~loan~~credit losses relating to our consumer loans receivable portfolio is recognized in transaction and ~~loan losses.~~credit losses on our condensed consolidated statements of income. The provision for interest receivable due to interest earned on our consumer loans receivable portfolio is recognized in net revenues from other value added services as a reduction to revenue. Loans receivable past the payment due date continue to accrue interest until they are charged off.

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We charge off consumer loan receivable balances in the month in which a customer’s balance becomes 180 days past the payment due date. Bankrupt accounts are charged off within 90 days after receipt of notification of bankruptcy. Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable.

Merchant Receivables

We offer business financing solutions to certain small and medium-sized merchants through our PayPal Working Capital (“PPWC”) and PayPal Business Loan (“PPBL”) products. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was ~~$2.6~~$3.0 billion and ~~$1.9~~$2.8 billion, respectively, net of the participation interest sold to an independent chartered financial institution of ~~$115~~$132 million and ~~$84~~$124 million, respectively.

Through our PPWC product, ~~a merchant~~merchants can borrow a certain percentage of ~~its~~their annual payment volume processed by PayPal and isare charged a fixed fee for the loan or advance, which targets an annual percentage rate based on the overall credit assessment of the merchant. Loans and advances are repaid through a fixed percentage of the merchant’s future payment volume that PayPal processes. Through our PPBL product, we provide merchants with access to short-term business financing for a fixed fee based on an evaluation of both the applying business as well as the business owner. PPBL repayments are collected bythrough periodic payments until the balance has been satisfied.

The interest or fee is fixed at the time the loan or advance is extended and is recognized as deferred revenues included in accrued expenses and other current liabilities inon our condensed consolidated balance sheets. The fixed interest or fee is amortized to revenues from other value added services based on the amount repaid over the repayment period. We estimate the repayment period based on the merchant’s payment processing history with PayPal, where available. For PPWC, there is a general requirement that at least 10% of the original amount of the loan or advance plus the fixed fee must be repaid every 90 days. We calculate the repayment rate of the merchant’s future payment volume so that repayment of the loan or advance and fixed fee is expected to generally occur within 9 to 12 months from the date of the loan or advance. On a monthly basis, we recalculate the repayment period based on the repayment activity on the receivable. As such, actual repayment periods are dependent on actual merchant payment processing volumes. For PPBL, we receive fixed periodic payments over the contractual term of the loan which generally ranges from 3 to 12 months. We actively monitor receivables with repayment periods greater than the original expected or contractual repayment period.

We closely monitor credit quality for our merchant loans and advances that we extend or purchase so that we can evaluate, quantify, and manage our credit risk exposure. To assess a merchant seeking a business financing loan or advance, we use, among other indicators, risk models developed internally which utilize information obtained from multiple internal and external data sources ~~both external and internal data~~ to predict the likelihood of timely and satisfactory repayment by the merchant of the loan or advance amount and the related interest or fee. Primary drivers of the models include the merchant’s annual payment volume, payment processing history with PayPal, and prior repayment history with the PayPal credit products where available, ~~elements~~information sourced from consumer credit bureau and business credit bureau reports, and other information obtained during the application process. We use delinquency status and trends to assist in making ongoing credit decisions, to adjust our internal models, to plan our collection ~~practices and~~ strategies, and in our determination of our allowance for these loans and advances.

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Merchant Receivables Delinquency and Allowance

The following ~~tables present~~table presents the delinquency status of the principal amount of merchant loans, advances, and interest and fees receivable by year of origination. The amounts are based on the number of days past the expected or contractual repayment date for amounts outstanding. The “current” category represents balances that are within 29 days of the billing date for loans with fixed repayment dates, or within 29 days of the expected repayment date.



March 31, 2020
(In millions, except percentages)
	2020		2019		2018		2017		2016		Total		Percentage
Current	$	1,388	$	1,266	$	28	$	—	$	—	$	2,682	89.6%
30 - 59 Days	17		90		13		—		—		120		4.0%
60 - 89 Days	3		56		8		—		—		67		2.2%
90 - 179 Days	—		94		15		—		—		109		3.6%
180+ Days	—		7		9		1		—		17		0.6%
Total	$	1,408	$	1,513	$	73	$	1	$	—	$	2,995	100%

The following table presents our estimate of the principal amount of merchant loans, advances, and interest and fees receivable past their original expected or contractual repayment ~~period.~~

September 30, 2019
(In millions)
Within Original Expected Repayment Period 30 - 59 Days Greater 60 - 89 Days Greater 90 - 180 Days Greater 180+ Days Total Past Original Expected Repayment Period Total
$ 2,344
$ 96
$ 52
$ 83
$ 16
$ 247
$ 2,591
90.5 % 3.7 % 2.0 % 3.2 % 0.6 % 9.5 % 100 %

~~Table~~period as of ~~Contents~~

December 31, 2019, prior to the adoption of the new credit losses accounting guidance as described in “Note 1—Overview and Summary of Significant Accounting Policies.”

December 31, 2018⁽¹⁾
(In millions)
Within Original Expected Repayment Period 30 - 59 Days Greater 60 - 89 Days Greater 90 - 180 Days Greater 180+ Days Total Past Original Expected Repayment Period Total
$ 1,706
$ 66
$ 32
$ 57
$ 13
$ 168
$ 1,874
91.0 % 3.6 % 1.7 % 3.0 % 0.7 % 9.0 % 100 %

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



December 31, 2019
(In millions)
Within Original Expected Repayment Period			30 - 59 Days Greater			60 - 89 Days Greater			90 - 180 Days Greater			180+ Days			Total Past Original Expected Repayment Period			Total
$	2,523		$	115		$	61		$	100		$	17		$	293		$	2,816
89.6		%	4.1		%	2.1		%	3.6		%	0.6		%	10.4		%	100		%

The following table summarizes the activity in the allowance for merchant loans, advances, and interest and fees receivable, for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019:



	March 31, 2020									March 31, 2019
	Merchant Loans and Advances			Interest and Fees Receivable			Total Allowance			Merchant Loans and Advances			Interest and Fees Receivable			Total Allowance
	(In millions)
Beginning balance	$	171		$	20		$	191		$	115		$	15		$	130
Adjustment for adoption of credit losses accounting standard	165			17			182			—			—			—
Provisions	243			24			267			54			6			60
Charge-offs	(78		)	(8		)	(86		)	(37		)	(3		)	(40		)
Recoveries	3			—			3			3			—			3
Ending balance	$	504		$	53		$	557		$	135		$	18		$	153

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Changes to the provision for the three months ended March 31, 2020 were primarily attributable to changes in current and projected macroeconomic conditions resulting in an increase of $159 million and our portfolio growth resulting in an increase of $85 million, both of which are used in estimating our expected credit losses. Changes to the charge-offs for the three months ended March 31, 2020 were primarily attributable to a significant expansion of the portfolio in 2019 and ~~2018:~~

September 30, 2019 September 30, 2018
Merchant Loans and Advances Interest and Fees Receivable Total Allowance Merchant Loans and Advances Interest and Fees Receivable Total Allowance
(In millions)
Beginning balance $ 115
$ 15
$ 130
$ 52
$ 7
$ 59
Provisions 181
22
203
120
18
138
Charge-offs (140 ) (16 ) (156 ) (80 ) (8 ) (88 )
Recoveries 11
—
11
7
—
7
Ending balance $ 167
$ 21
$ 188
$ 99
$ 17
$ 116

a decline in transaction processing volume on our Payments Platform for certain merchants which adversely impacted the delinquency of our merchant loans, advances, and interest and fees receivable portfolio.

For merchant loans and advances, the determination of delinquency, from current to 180 days past due, is based on the current expected or contractual repayment period of the loan or advance and fixed interest or fee payment as compared to the original expected or contractual repayment period. We charge off the receivables outstanding under our PPBL product when the repayments are 180 days past due. We charge off the receivables outstanding under our PPWC product when the repayments are 180 days past our expectation of repayments and the merchant has not made a payment in the last 60 days or when the repayments are 360 days past due regardless of whether the merchant has made a payment within the last 60 days. Bankrupt accounts are charged off within 60 days of receiving notification of bankruptcy. The provision for ~~loan~~credit losses is recognized in transaction and ~~loan~~credit losses, and the provisions for interest and fees receivable is recognized as a reduction of deferred revenues included in accrued and other current liabilities inon our condensed consolidated balance sheets. Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable.

Note 12—Debt

Long-term Debt

Fixed Rate Notes

On September 26, 2019, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $5.0 billion (collectively referred to as the “Notes”). The Notes are senior unsecured obligations. Interest is payable in arrears semiannually (payable March 26 and September 26 for the notes due in 2022 and payable April 1 and October 1 for the remaining notes). We may redeem the Notes in whole at any time or in part from time to time, prior to maturity, at the redemption price. Upon the occurrence of both a change of control and a downgrade of the Notes below an investment grade rating, we will be required to offer to repurchase each series of Notes at a price equal to 101% of the then outstanding principal amount, plus accrued and unpaid interest. The Notes are subject to covenants including limitations on our ability to create liens on our assets, enter into sale and leaseback transactions, and merge or consolidate with another entity, in each case subject to certain exceptions, limitations, and qualifications. Proceeds from the issuance of these Notes may be used for general corporate purposes, which may include funding the repayment or redemption of outstanding debt, share repurchases, ongoing operations, capital expenditures, and possible acquisitions of businesses, assets, or strategic investments.

~~Table of Contents~~

As of ~~September 30, 2019,~~March 31, 2020, we had an outstanding aggregate principal amount of $5.0 billion related to the Notes. The following table summarizes the Notes:

Balance at September 30, 2019
Maturities Amount Effective Interest Rate
(in millions)
Fixed-rate 2.200% notes 9/26/2022 $ 1,000
2.39%
Fixed-rate 2.400% notes 10/1/2024 1,250
2.52%
Fixed-rate 2.650% notes 10/1/2026 1,250
2.78%
Fixed-rate 2.850% notes 10/1/2029 1,500
2.96%
Total term debt 5,000

Unamortized premium (discount) and issuance costs, net (36 )
Total carrying amount of term debt $ 4,964



		Balance at March 31, 2020
	Maturities	Amount			Effective Interest Rate
		(in millions)
Fixed-rate 2.200% notes	9/26/2022	$	1,000		2.39%
Fixed-rate 2.400% notes	10/1/2024	1,250			2.52%
Fixed-rate 2.650% notes	10/1/2026	1,250			2.78%
Fixed-rate 2.850% notes	10/1/2029	1,500			2.96%
Total term debt		5,000

Unamortized premium (discount) and issuance costs, net		(33		)
Total carrying amount of term debt		$	4,967

The effective interest rates for the Notes include interest on the Notes, amortization of debt issuance costs, and amortization of the debt discount. The interest expense recorded for the Notes, including amortization of the debt discount and debt issuance costs, was $2$33 million for the three ~~and nine~~ months ended ~~September 30, 2019.~~

~~Credit Facilities~~March 31, 2020.

Five-Year Revolving Credit Facility

OnIn September ~~11,~~ 2019, we entered into a credit agreement (the “Credit Agreement”) that provides for an unsecured $5.0 billion, five-year revolving credit facility that includes a $150 million letter of credit sub-facility and a $500 million swingline sub-facility, with available borrowings under the revolving credit facility reduced by the amount of any letters of credit and swingline borrowings outstanding from time to time. Loans borrowed under the Credit Agreement are available in U.S. dollar, Euro, British Pound, Canadian dollar, and Australian dollar, and in each case subject to the sub-limits and other limitations provided in the Credit Agreement. We may also, subject to the agreement of the applicable lenders and satisfaction of specified conditions, increase the commitments under the revolving credit facility by up to $2.0 billion. Subject to specific conditions,In March 2020, we ~~may designate 1 or more of our subsidiaries as additional borrowers under the Credit Agreement, provided PayPal Holdings, Inc. guarantees all borrowings and other obligations of any such subsidiaries~~drew down $3.0 billion under the Credit Agreement. As of ~~September 30, 2019, 0 subsidiaries were designated as additional borrowers. Funds borrowed~~March 31, 2020, $3.0 billion was outstanding under the Credit Agreement ~~may be used for working capital, capital expenditures, acquisitions,~~at a weighted average interest rate of 2.19%, and ~~other purposes not in contravention with the Credit Agreement.~~

We are obligated to pay interest on loans under the Credit Agreement and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee based on our debt rating. Loans under the Credit Agreement bear interest at either (i) the applicable eurocurrency rate plus a margin (based on our public debt ratings) ranging from 0.875 percent to 1.375 percent, (ii) the applicable overnight rate plus a margin (based on our public debt ratings) ranging from 0.875 percent to 1.375 percent, or (iii) a formula based on the prime rate, the federal funds effective rate or London Interbank Offered Rate (“LIBOR”) plus a margin (based on our public debt ratings) ranging from 0 percent to 0.375 percent. The Credit Agreement will terminate and all amounts owed thereunder will be due and payable in September 2024, unless the commitments are terminated earlier. The Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default, and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and the incurrence of subsidiary indebtedness, in each case subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a maximum consolidated leverage ratio.

~~Table of Contents~~

~~As of September 30, 2019, 0 borrowings or letters of credit were outstanding under the Credit Agreement. Accordingly, at September 30, 2019, $5.0~~accordingly, $2.0 billion of borrowing capacity was available for the purposes permitted by the Credit Agreement, subject to customary conditions ~~to borrowing.~~

~~Upon our entry into the Credit Agreement, the credit agreement that we entered into in the third quarter~~

Table of ~~2015 that provided for an unsecured $2.0 billion, five-year revolving credit facility was terminated.~~Contents

PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~364-Day Revolving Credit Facility~~

On September 11, 2019, we entered into a 364-day credit agreement (“364-Day Credit Agreement”) that provides for an unsecured $1.0 billion 364-day revolving credit facility. Subject to specific conditions, we may designate 1 or more of our subsidiaries as additional borrowers under the 364-Day Credit Agreement provided PayPal Holdings, Inc. guarantees all borrowings and other obligations of any such subsidiaries under the 364-Day Credit Agreement. As of September 30, 2019, 0 subsidiaries were designated as additional borrowers. Funds borrowed under the 364-Day Credit Agreement may be used for working capital, capital expenditures, acquisitions, and other purposes not in contravention with the Credit Agreement.

We are obligated to pay interest on loans under the 364-Day Credit Agreement and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee based on our debt rating. Loans under the 364-Day Credit Agreement bear interest at either (i) LIBOR plus a margin (based on our debt ratings) ranging from 0.875 percent to 1.375 percent or (ii) a formula based on the agent bank’s prime rate, the New York Federal Reserve Bank rate (the greater of the federal funds effective rate and the overnight bank funding rate), or LIBOR plus a margin (based on our public debt ratings) ranging from 0 percent to 0.375 percent. The 364-Day Credit Agreement will terminate and all amounts owed thereunder will be due and payable in September 2020, unless the commitments are terminated earlier. The 364-Day Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including a financial covenant), events of default, and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and the incurrence of subsidiary indebtedness, in each case subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a maximum consolidated leverage ratio.

As of September 30, 2019, 0 borrowings were outstanding under the 364-Day Credit Agreement. Accordingly, at September 30, 2019, $1.0 billion of borrowing capacity was available for the purposes permitted by the 364-Day Credit Agreement, subject to customary conditions to borrowing.

~~Other Facilities~~

In the fourth quarter of 2018, we entered into an amended credit agreement (“Amended Credit Agreement”), which amended and restated in its entirety the previous agreement entered into in 2017. The Amended Credit Agreement provided for an unsecured $5.0 billion, 364-day delayed-draw term loan credit facility, which was available in up to 4 separate borrowings until April 6, 2019. We were obligated to pay interest on loans under the Amended Credit Agreement and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee based on our debt rating. As of December 31, 2018, $2.0 billion was outstanding under the Amended Credit Agreement. On April 5, 2019, the Company drew down an additional $500 million under the Amended Credit Agreement. On September 26, 2019, the Amended Credit Agreement was terminated and we repaid $2.5 billion of borrowings outstanding under such agreement. The total interest expense and fees we recorded related to the ~~Amended~~ Credit Agreement ~~were~~was approximately ~~$25 million and $69~~$3 million for the three ~~and nine~~ months ended ~~September 30, 2019.~~March 31, 2020.

Unused Credit Facilities

We also maintain ~~committed and~~ uncommitted credit facilities in various regions throughout the world, with borrowing capacity of approximately ~~$230~~$130 million in the aggregate. This available credit ~~a portion of which is guaranteed by PayPal Holdings, Inc.,~~ includes facilities where we can withdraw and utilize the funds at our discretion for general corporate ~~purposes, capital expenditures, and acquisitions.~~purposes. Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings. As of ~~September 30, 2019,~~March 31, 2020, substantially all of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing.

~~Table of Contents~~

~~Future Principal Payments~~

~~As of September 30, 2019, the future principal payments associated with our long term debt were as follows (in millions):~~

2019 $ —
2020 —
2021 —
2022 1,000
2023 —
Thereafter 4,000
Total $ 5,000

Other than as provided above, there are no significant changes to the information disclosed in our ~~2018~~2019 Form 10-K.

Note 13—Commitments and Contingencies

Commitments

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, approximately ~~$2.6~~$3.1 billion ~~and $1.8 billion, respectively,~~ of unused credit was available to PayPal Credit account holders. 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.

Litigation and Regulatory Matters

Overview

We are involved in legal and regulatory proceedings on an ongoing basis. Many of these proceedings are in early stages and may seek an indeterminate amount of damages. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a legal proceeding, we have disclosed that fact. In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 13, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.

Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable were not material for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. Except as otherwise noted for the proceedings described in this Note 13, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were resolved against us in a reporting period for amounts in excess of management’s expectations, the impact on our operating results or financial condition for that reporting period could be material.

3534

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Regulatory Proceedings

We are required to comply with U.S. economic and trade sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). We have self-reported to OFAC certain transactions that were inadvertently processed but subsequently identified as possible violations of U.S. economic and trade sanctions. In March 2015, we reached a settlement with OFAC regarding possible violations arising from our sanctions compliance practices between 2009 and 2013, prior to the implementation of our real-time transaction scanning program. Subsequently, we have self-reported additional transactions as possible violations, and we have received new subpoenas from OFAC seeking additional information about certain of these transactions. Such self-reported transactions could result in claims or actions against us, including litigation, injunctions, damage awards, fines or penalties, or require us to change our business practices in a manner that could result in a material loss, require significant management time, result in the diversion of significant operational resources, or otherwise harm our business.

On March 28, 2016, we received a Civil Investigative Demand (“CID”) from the Federal Trade Commission (“FTC”) as part of its investigation to determine whether we, through our Venmo service, have been or are engaged in deceptive or unfair practices in violation of the Federal Trade Commission Act. The CID requested the production of documents and answers to written questions related to our Venmo service. We have cooperated with the FTC in connection with the CID. On February 27, 2018, we entered into a Consent Order with the FTC in which we settled potential allegations arising from our Venmo services between 2013 and 2017. The Consent Order does not contain a monetary penalty, but requires PayPal to make various changes to Venmo’s disclosures and business practices. The FTC approved the final Consent Order on May 24, 2018. As required by the Consent Order, we are working with the FTC making changes necessary to comply with the Consent Order. Any failure to comply with the Consent Order may increase the possibility of additional adverse consequences, including litigation, additional regulatory actions, injunctions, or monetary penalties, or require further changes to our business practices, significant management time, or the diversion of significant operational resources, all of which could result in a material loss or otherwise harm our business.

As previously disclosed, PayPal Australia Pty Limited (“PPAU”) self-reported a potential violation to the Australian Transaction Reports and Analysis Centre (“AUSTRAC”) on May 22, 2019 with respect to the reporting of international funds transfer instructions under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (“AML/CTF Act”). On September 23, 2019, PPAU received a notice from AUSTRAC requiring that PPAU appoint an external auditor (a partner of a firm which is not our independent auditor) to review certain aspects of PPAU’s compliance with its obligations under the AML/CTF Act. The external auditor was appointed on November 1, 2019, and PPAU is continuing to cooperate with AUSTRAC and the appointed external auditor in this matter. As required under the terms of AUSTRAC’s notice, as amended, PPAU issued interim reports to AUSTRAC on December 31, 2019 and March 13, 2020. The external auditor is due to issue a final report on August 31, 2020. We cannot estimate the potential impact, if any, on our business or financial statements at this time. An adverse outcome arising from the external auditor’s review and any associated proceeding or matter initiated by AUSTRAC, however, could result in injunctions, damage awards, fines or penalties, or require us to change our business practices in a manner that could result in a material loss, require significant management time, result in the diversion of significant operational resources, or otherwise harm our business.

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Legal Proceedings

In November 2017, we announced that we had suspended the operations of TIO Networks (“TIO”) as part of an ongoing investigation of security vulnerabilities of the TIO platform. On December 1, 2017, we announced that we had identified evidence of unauthorized access to TIO’s network, including locations that stored personal information of some of TIO’s customers and customers of TIO billers and the potential compromise of personally identifiable information for approximately 1.6 million customers. We have received a number of governmental inquiries, including from state attorneys general, and we may be subject to additional governmental inquiries and investigations in the future. In addition, on December 6, 2017, a putative class action lawsuit captioned Sgarlata v. PayPal Holdings, Inc., et al., Case No. 3:17-cv-06956-EMC was filed in the U.S. District Court for the Northern District of California (the “Court”) against the Company, its Chief Executive Officer, its Chief Financial Officer and Hamed Shahbazi, the former chief executive officer of TIO (the “Defendants”) alleging violations of federal securities laws. The initial complaint alleged that Defendants made false or misleading statements or failed to disclose that TIO’s data security program was inadequate to safeguard the personally identifiable information of its users, those vulnerabilities threatened continued operation of TIO’s platform, the Company’s revenues derived from TIO services were thus unsustainable, and consequently, the Company overstated the benefits of the TIO acquisition, and, as a result, the Company’s public statements were materially false and misleading at all relevant times. The plaintiff who initiated the lawsuit sought to represent a class of shareholders who acquired shares of the Company’s common stock between February 14, 2017 through December 1, 2017 and sought damages and attorneys’ fees, among other relief. On March 16, 2018, the Court appointed 2 new plaintiffs, not the original plaintiff who filed the case, as interim co-lead plaintiffs in the case and appointed two law firms as interim co-lead counsel. On June 13, 2018, the interim co-lead plaintiffs filed a first amended complaint, which named TIO Networks ULC, TIO Networks USA, Inc., and John Kunze ~~(the~~(at that time, the Company’s Vice President, Global Consumer Products and Xoom) as additional defendants. The first amended complaint was purportedly brought on behalf of all persons other than the Defendants who acquired the Company’s securities between November 10, 2017 and December 1, 2017. The amended complaint alleged that the Company’s and TIO’s November 10, 2017 announcement of the suspension of TIO’s operations was false and misleading because the announcement only disclosed security vulnerabilities on TIO’s platform, rather than an actual security breach that Defendants were allegedly aware of at the time of the announcement. Defendants’ filed their motion to dismiss the first amended complaint on July 13, 2018 and the Court granted the motion, without prejudice, on December 13, 2018. Plaintiffs filed a second amended complaint on January 14, 2019. The second amended complaint alleges substantially the same theory of liability as the first amended complaint, but no longer names Hamed Shabazi as a defendant. The remaining Defendants filed their motion to dismiss the second amended complaint on March 15, 2019, and a hearing was held on July 16, 2019. The court granted ~~Defendant's~~Defendant’s motion to dismiss with prejudice on September 18, 2019; plaintiffs have filed a notice of appeal. We may be subject to additional litigation relating to TIO’s data security platform or the suspension of TIO’s operations in the future.

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General Matters

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our business as our products and services continue to expand in scope and complexity. Such claims may be brought directly or indirectly against our companies and/or against our customers (who may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our acquisitions, particularly in cases where we are introducing new products or services in connection with such acquisitions. We have in the past been forced to litigate such claims, and we believe that additional lawsuits alleging such claims will be filed against us. Intellectual property claims, whether meritorious or not, are time consuming and costly to defend and resolve, could require expensive changes in our methods of doing business, or could require us to enter into costly royalty or licensing agreements on unfavorable terms or make substantial payments to settle claims or to satisfy damages awarded by courts.

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our customers (individually or as class actions) alleging, among other things, improper disclosure of our prices, rules, or policies, that our practices, prices, rules, policies, or customer/user agreements violate applicable law, or that we have acted unfairly and/or not acted in conformity with such prices, rules, policies, or agreements. In addition to these types of disputes and regulatory inquiries, our operations are also subject to regulatory and/or legal review and/or challenges that tend to reflect the increasing global regulatory focus to which the payments industry is subject and, when taken as a whole with other regulatory and legislative action, such actions could result in the imposition of costly new compliance burdens on our business and customers and may lead to increased costs and decreased transaction volume and revenue. Further, the number and significance of these disputes and inquiries are increasing as we have grown larger, our business has expanded in scope (both in terms of the range of products and services that we offer and our geographical operations), and our products and services have increased in complexity. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, settlement payments, damage awards (including statutory damages for certain causes of action in certain jurisdictions), fines, penalties, injunctive relief, or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources, or otherwise harm our business.

Indemnification Provisions

In 2015, PayPal became an independent publicly traded company through the pro rata distribution by eBay Inc. (“eBay”) of 100% of the outstanding common stock of PayPal to eBay stockholders (which we refer to as the “separation” or the “distribution”). We entered into a separation and distribution agreement, a tax matters agreement, an operating agreement, and various other agreements with eBay ~~Inc. (“eBay”)~~ to govern the separation of the two companies ~~in 2015~~ and the relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations for both eBay and us. Disputes between eBay and us have arisen and others may arise in the future, and an adverse outcome in such matters could materially and adversely impact our business, results of operations, and financial condition. In addition, the indemnity rights we have against eBay under the agreements may not be sufficient to protect us, and our indemnity obligations to eBay may be significant.

In the ordinary course of business, we include limited indemnification provisions in certain of our agreements with parties with whom we have commercial relationships. Under these contracts, we generally indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by any third party with respect to our domain names, trademarks, logos, and other branding elements to the extent that such marks are related to the subject agreement. We have provided an indemnity for other types of third-party claims, which are indemnities mainly related to intellectual property rights, confidentiality, willful misconduct, data privacy obligations, and certain breach of contract claims. We have also provided an indemnity to our payments processors in the event of card association fines against the processor arising out of conduct by us or our customers. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular situation. To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification provisions.

Off-Balance Sheet Arrangements

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~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.

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Protection Programs

We provide merchants and consumers with protection programs on most transactions completed on our Payments Platform, except for transactions using our gateway products or where our customer agreements specifically do not provide for protections. These programs 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 a purchased item does not arrive 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 an item was not received by covering the seller for the full amount of the payment on eligible sales. These protection programs are considered assurance-type warranties for which we estimate and record associated costs in transaction and ~~loan~~credit losses during the period the payment transaction is completed.

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The maximum potential exposure under our protection programs is estimated to be the portion of total eligible transaction volume ~~(TPV)~~(total payment volume) for which buyer or seller protection claims may be raised under our existing user agreements. Since eligible transactions are typically completed in a period significantly shorter than the period under which disputes may be opened, and based on our historical losses to date, we do not believe that the maximum potential exposure is representative of our actual potential exposure. The actual amount of potential exposure cannot be quantified as we are unable to determine total eligible transactions where performance by a merchant or consumer is incomplete or completed transactions that may result in a claim under our protection programs. We record a liability with respect to losses under these protection programs when they are probable and the amount can be reasonably estimated. The following table shows changes in the allowance for transaction losses and negative customer balances related to our protection programs for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
	(In millions)												(in millions)
Beginning balance	$	395		$	304		$	344		$	266		$	399		$	344
Provisions, net of recoveries	256			259			789			764
Provision													247			286
Realized losses	(295		)	(244		)	(777		)	(711		)	(270		)	(261		)
Recoveries													20			16
Ending balance	$	356		$	319		$	356		$	319		$	396		$	385

Note 14—Stock Repurchase Programs

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we repurchased approximately $1.1 billion of our common stock, including approximately $350 million in the open market and approximately $750 million pursuant to the accelerated share repurchase (“ASR”) agreement under our stock repurchase program authorized in April 2017.

In February 2019, we entered into an ASR agreement with an unrelated third party financial institution to repurchase shares of our common stock. Under the terms of the ASR agreement, we made an upfront payment of $750 million to the third party financial institution and received approximately 7.78 million shares of our common stock for approximately $800 million at an average ~~price~~cost of ~~$96.91 per share of common~~$106.15. These shares were purchased in the open market under our stock repurchase programs authorized in April 2017 and July 2018. The July 2018 stock repurchase program became effective during the ~~term~~first quarter of 2020 upon completion of the ~~transaction, which ended in March 2019. The total number of shares of our common~~April 2017 stock repurchased was based on the volume-weighted average share price of our common stock during the term of the transaction, less a discount, and subject to adjustments pursuant to the terms of the ASR agreement. We recorded the initial payment of $750 million as a reduction to stockholders’ equity on our condensed consolidated balance sheets. All common stock received under the ASR agreement was recorded as treasury stock and the forward contract indexed to our own common stock met all applicable criteria for equity classification.

repurchase program. As of ~~September 30, 2019,~~March 31, 2020, a total of approximately ~~$374 million and $10~~$9.3 billion remained available for future repurchases of our common stock under our ~~April 2017 and~~ July 2018 stock repurchase ~~programs, respectively.~~program.

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Note 15—Stock-Based Plans

Stock-Based Compensation Expense

We record stock-based compensation expense for our equity incentive plans in accordance with ~~U.S.~~ GAAP, which requires the measurement and recognition of compensation expense based on estimated fair values.

The impact on our results of operations of recording stock-based compensation expense under our equity incentive plans for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
	(In millions)								(In millions)
Customer support and operations	$	51	$	46	$	144	$	129	$	52	$	48
Sales and marketing	31		30		95		93		39		32
Technology and development	119		76		292		222		113		93
General and administrative	72		65		226		192		87		81
Total stock-based compensation expense	$	273	$	217	$	757	$	636	$	291	$	254
Capitalized as part of internal use software and website development costs	$	10	$	9	$	29	$	26	$	10	$	10

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PayPal Holdings, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 16—Income Taxes

Our effective tax rate for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 was 5%68% and ~~9%, respectively. Our effective tax rate for the three and nine months ended September 30, 2018 was 18% and 13%~~7%, respectively. The difference between our effective tax rate and the U.S. federal statutory rate of 21% in ~~all~~both periods was primarily the result of foreign income taxed at different rates, ~~and~~ discrete tax ~~adjustments. During the third quarter of 2019, we settled a U.S. Federal tax audit. This settlement did not have a material impact on our condensed consolidated statements of income.~~

~~In June 2019, the U.S. Court of Appeals~~adjustments, and for the ~~Ninth Circuit reversed~~three months ended March 31, 2020, tax expense related to the ~~July 2015 decision~~intra-group transfer of ~~the U.S. Tax Court in~~ ~~Altera Corp.~~ v. ~~Commissioner~~. In the June 2019 decision, the U.S. Court of Appeals held that a Treasury Regulation requiring stock-based compensation to be included in a qualified intercompany cost sharing arrangement was valid. We have reviewed this case and determined no adjustment is required to PayPal’s condensed consolidated financial statements as a result of this ruling.intellectual property.

Note 17—Restructuring

During the first quarter of ~~2019~~2020 and ~~2018,~~2019, management approved strategic reductions of the existing global workforce, which resulted in restructuring charges of $29 million and $78 million, respectively. The approved strategic reduction in 2020 is part of a multiphase process to reorganize our workforce concurrently with the redesign of our operating structure, which we expect will span multiple quarters. We primarily incurred employee severance and ~~$25 million, respectively.~~benefits costs under the 2020 strategic reduction, as well as other associated consultancy costs. This strategic reduction is expected to be substantially completed by the end of 2020. The approved strategic reductions for 2019 ~~are~~were intended to better align our teams to support key business priorities and ~~also includes~~included the transfer of certain operational functions between geographies, as well as the impact of the transition ~~of interim~~ servicing activities provided to Synchrony, ~~Bank,~~ which ended in the second quarter of 2019. We primarily incurred employee severance and benefits expenses under the 2019 strategic ~~reductions. The cash payments associated with the 2019 restructuring are expected to be~~reductions, which were substantially completed by the end of ~~2019. The strategic reduction approved in~~ the first quarter of 2018 includes restructuring charges related to the decision to wind down TIO’s operations. We incurred employee and severance benefits expenses under the 2018 strategic reduction, which was substantially completed by the end of 2018.

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2020.

The following table summarizes the restructuring reserve activity during the ~~nine~~three months ended ~~September 30, 2019:~~March 31, 2020:


	Employee Severance and Benefits			Employee Severance and Benefits and Other Associated Costs
	(In millions)			(In millions)
Accrued liability as of January 1, 2019	$	3
Accrued liability as of January 1, 2020				$	9
Charges	78			29
Payments	(60		)	(5		)
Accrued liability as of September 30, 2019	$	21
Accrued liability as of March 31, 2020				$	33

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q 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). 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 Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 (the ~~“2018~~“2019 Form 10-K”), as supplemented in the risk factors set forth below in Part II, Item 1A, Risk Factors, of this Form 10-Q, as well as in our unaudited condensed 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 unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report. Unless otherwise expressly stated or the context otherwise requires, references to “we,” “our,” “us,” “the Company,” and “PayPal” refer to PayPal Holdings, Inc. and its consolidated subsidiaries.

Business Environment

We are a leading technology platform and digital payments company that enables digital and mobile payments on behalf of ~~consumers~~merchants and ~~merchants~~consumers worldwide. PayPal is committed to democratizing financial services and empowering people and businesses to join and thrive in the global economy. Our goal is to enable our ~~consumers~~merchants and ~~merchants~~consumers to manage and move their money anywhere in the world, anytime, on any platform, and using any device. We also facilitate person-to-person (“P2P”) payments through our PayPal, Venmo, and Xoom ~~products.~~products and services and simplify and personalize shopping experiences for our consumers through our Honey Platform. Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products and services, comprise our proprietary Payments Platform.

Information security risks for global payments and technology companies like us have significantly increased in recent years. We are not immune to these risks and there can be no assurance that we will not suffer such losses in the future. For additional information regarding our information security risks, see Part I, Item 1A, Risk Factors in our ~~2018~~2019 Form 10-K, as supplemented and, to the extent inconsistent, superseded below (if applicable) in Part II, Item 1A, Risk Factors in this Form 10-Q.

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) as a pandemic. The rapidly changing global market and economic conditions as a result of COVID 19 have impacted, and are expected to continue to impact, our operations and business. To protect the health and safety of our employees, we have modified our business practices, including restrictions on employee travel, closings or significant limitations on employee work locations, and cancellation of physical participation in meetings, events, and conferences, among other modifications. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, and business partners. The broader implications of the COVID-19 outbreak on our business, financial condition, and results of operations remain uncertain. The COVID-19 outbreak has adversely impacted, and is likely to continue to adversely impact global commerce due to reduced business activity and customer spending, and increased unemployment rates, among other factors, which could materially and adversely impact our business, financial condition, and results of operations in future periods. For additional information on how COVID-19 has impacted and could continue to negatively impact our business, see below for specific discussion in the respective areas, and also refer to Part II, Item 1A, Risk Factors in this Form 10-Q.

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The United Kingdom (“U.K.”) held a referendum in June 2016 in which a majority of voters approved an exit from the European Union (“EU”), commonly referred to as “Brexit.” ~~In March 2017,~~The U.K. formally exited the ~~U.K. government initiated the exit process under Article 50 of the Treaty~~EU on ~~European Union, which commenced~~January 31, 2020 and a ~~two-year~~transition period ~~expiring on March 29, 2019, after~~is in place until December 31, 2020 during which time the U.K. ~~was expected to leave~~will remain in both the ~~EU. The~~ EU ~~subsequently extended the date to October 31, 2019.~~customs union and single market and follow EU rules. There is a significant lack of clarity over the ~~eventual date and terms of the U.K.’s exit from the EU and the~~ terms of the U.K.’s future relationship with the EU. The U.K.’s financial service regulators are implementing Temporary Permission Regimes (“TPR”) to support European Economic Area (“EEA”) financial service firms in continuing to conduct business in the U.K. should the U.K. exit the EU without an agreement. The final TPR rules will come into effect if the U.K. leaves the EU without an agreement. Accordingly, we may need to adjust our business to comply with additional legal and regulatory requirements if accessing the TPR.after that date. We are currently unable to determine the impact that Brexit will have on our business, as any impact will depend, in part, on the outcome of tariff, trade, regulatory, and other negotiations. For additional information on how Brexit could affect our business, see Part I, Item 1A, Risk Factors in our ~~2018~~2019 Form ~~10-K, as supplemented below in Part II, Item 1A, Risk Factors in this Form 10-Q.~~10-K.

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Brexit could adversely affect U.K., regional (including European), and worldwide economic and market conditions, and could contribute to instability in global financial and foreign currency exchange markets, including volatility in the value of the British Pound and Euro. We have foreign currency exchange exposure management programs designed to help reduce the impact from foreign currency exchange rate movements. Net revenues generated from our U.K. operations constituted ~~approximately~~ 10% of total net revenues for both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and approximately 11% of total net revenues for both the three and nine months ended September 30, 2018.~~respectively. During each of these periods, net revenues generated from the EU (excluding the U.K.) constituted less than 20% of total net revenues. Approximately ~~33%~~35% and ~~31%~~37% of our gross loans and interest receivables as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, were generated from our U.K. operations. Approximately 7% and 6% of our gross loans and interest receivables as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019, respectively, were generated from ~~our~~the EU ~~operations~~ (excluding the U.K.).

Overview of Results of Operations

The following table provides a summary of our condensed consolidated ~~GAAP~~ financial results for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:


	Three Months Ended September 30,						Percent Increase/(Decrease)			Nine Months Ended September 30,								Percent Increase/(Decrease)		Three Months Ended March 31,								Percent Increase/(Decrease)
	2019			2018					2019				2018				2020				2019							Percent Increase/(Decrease)
	(In millions, except percentages and per share data)																			(In millions, except percentages and per share data)
Net revenues	$	4,378		$	3,683		Percent Increase/(Decrease)	19	%		$	12,811			$	11,225		Percent Increase/(Decrease)			14	%	$	4,618			$	4,128		12	%
Operating expenses	3,681			3,193			15	%		10,891				9,629				13	%	4,220				3,610				17	%
Operating income	$	697		$	490		42	%		$	1,920			$	1,596			20	%	$	398			$	518			(23	)%
Operating margin	16		%	13		%	**			15		%		14		%		**		9		%		13		%		**
Other income (expense), net	$	(213	)	$	43		**			$	224			$	94			**		$	(135	)		$	199			(168	)%
Income tax expense	$	22		$	97		(77	)%		$	192			$	217			(12	)%	$	179			$	50			258	%
Effective tax rate	5		%	18		%	**			9		%		13		%		**		68		%		7		%		**
Net income	$	462		$	436		6	%		$	1,952			$	1,473			33	%	$	84			$	667			(87	)%
Net income per diluted share	$	0.39		$	0.36		7	%		$	1.64			$	1.22			35	%	$	0.07			$	0.56			(87	)%
Net cash provided by operating activities	$	1,096		$	4,670		**			$	3,297			$	4,349			**		$	1,504			$	1,027			46	%

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

Three Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~

Net revenues increased ~~$695~~$490 million, or ~~19%~~12%, in the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the same period of the prior year, driven primarily by growth in ~~TPV (as~~total payment volume (“TPV”, as defined below under “Net Revenues”) of ~~25%~~18%, compared to the same period of the prior year. ~~Net revenues from acquisitions completed in 2018 collectively~~Our acquisition of Honey Science Corporation (“Honey”) contributed approximately ~~two~~one percentage ~~points~~point to the growth rate inof net revenues for the three months ended ~~September 30, 2019.~~March 31, 2020.

Total operating expenses increased ~~$488~~$610 million, or ~~15%~~17%, in the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the same period of the prior year, due primarily to increases in transaction and credit losses, transaction expense, and technology and development expense. ~~Operating expenses related to~~Our acquisitions ~~completed in 2018~~of Honey and Guofubao Information Technology Co. (GoPay), Ltd. (“GoPay”) collectively contributed approximately ~~three~~five percentage points to the growth rate inof total operating expenses for the three months ended ~~September 30, 2019.~~March 31, 2020.

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Operating income ~~increased~~decreased by ~~$207~~$120 million, or ~~42%~~23%, in the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the same period of the prior year, due to growth in ~~net revenues~~operating expenses, partially offset by an increase in net revenues. Our operating ~~expenses. Acquisitions completed~~margin was 9% and 13% in ~~2018~~the three months ended March 31, 2020 and March 31, 2019, respectively. Operating margin for the three months ended March 31, 2020 was negatively impacted by an increase in transaction and credit losses due primarily to the macroeconomic forecasts reflecting the anticipated impact of COVID-19 on the lifetime expected credit losses on our portfolio of loans and interest receivable, as discussed below. Our acquisitions of Honey and GoPay collectively had a negative impact of approximately three percentage points ~~to the growth rate in~~on our operating ~~income for the three months ended September 30, 2019. Our operating margin was 16% and 13% in the three months ended September 30, 2019 and September 30, 2018, respectively. Operating~~ margin for the three months ended September 30, 2019 was positively impacted by operating efficiencies, partially offset by the negative impact of growth in transaction expense, which increased 25% in the three months ended September 30, 2019, compared to 19% increase in net revenues in the same period.March 31, 2020.

Net income ~~increased~~decreased by ~~$26~~$583 million, or 6%87%, in the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the same period of the prior year, due to ~~an increase~~the previously discussed decrease in operating income of ~~$207~~$120 million, ~~and a decrease in income tax expense of $75 million, offset by~~ a decrease of ~~$256~~$334 million in other income (expense), net driven primarily by unrealized losses on strategic ~~investments.~~

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~~Nine Months Ended September 30, 2019 and 2018~~

Net revenues increased $1.6 billion, or 14%, in the nine months ended September 30, 2019, compared to the same period of the prior year, driven primarily by growth in TPV of 24%, compared to the same period of the prior year. Net revenues from acquisitions completed in 2018 collectively contributed approximately two percentage points to the growth rate in the nine months ended September 30, 2019. These increases were 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 five percentage points to the net revenues growth rate in the nine months ended September 30, 2019.

Total operating expenses increased $1.3 billion, or 13%, in the nine months ended September 30, 2019, compared to the same period of the prior year, due primarily to increases in transaction expense, technology and development, customer support and operations, and general and administrative expenses, partially offset by a decline in restructuring and other charges. Operating expenses related to acquisitions completed in 2018 collectively contributed three percentage points to the growth rate in the nine months ended September 30, 2019.

Operating income increased by $324 million, or 20%, in the nine months ended September 30, 2019, compared to the same period of the prior year, due to growth in net revenues partially offset by an increase in operating expenses. Acquisitions completed in 2018 collectively had a negative impact of approximately eight percentage points to the growth rate in operating income for the nine months ended September 30, 2019. Our operating margin was 15% and 14% in the nine months ended September 30, 2019 and September 30, 2018, respectively. Operating margin for the nine months ended September 30, 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 transaction expense, which increased 22% in the nine months ended September 30, 2019, compared to 14% increase in net revenues in the same period. Acquisitions completed in 2018 collectively had a negative impact of approximately one percentage point on our operating margin for the nine months ended September 30, 2019.

Net income increased by $479 million, or 33%, in the nine months ended September 30, 2019, compared to the same period of the prior year, due to an increase in operating income of $324 million, an increase in other income (expense), net of $130 million driven by unrealized gains on strategic investments, and ~~a decrease~~an increase in income tax expense of ~~$25 million.~~$129 million, driven primarily by tax expense related to the intra-group transfer of intellectual property.

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 each of the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ we generated approximately 47% of our net revenues from customers domiciled outside of the U.S. ~~In the nine months ended September 30, 2019 and 2018, we generated approximately 47% and 45% of our net revenues from customers domiciled outside of the U.S., respectively.~~ Because we ~~have generated~~generate substantial net revenues internationally, ~~in recent periods, including during the periods presented,~~ we are subject to the risks of doing business outside of the U.S. See Part I, Item 1A, Risk Factors in our ~~2018~~2019 Form 10-K, as supplemented and, to the extent inconsistent, superseded (if applicable) below in Part II, Item 1A, Risk Factors in this Form 10-Q.

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 whereby we designate certain foreign currency exchange contracts as cash flow hedges intended to reduce the impact on earnings from foreign currency exchange rate movements. Gains and losses from these foreign currency exchange contracts are recognized as a component of transaction revenues in the same period the forecasted transactions impact earnings.

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In the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and March 31, 2019, ~~and September 30, 2018,~~ year-over-year foreign currency movements relative to the U.S. dollar had the following impact on our reported results:


	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019			Three Months Ended March 31, 2020
	(In millions)						(In millions)
Unfavorable impact to net revenues (exclusive of hedging impact)	$	(72	)	$	(281	)	$	(50	)
Hedging impact	70			180			42
Unfavorable impact to net revenues	(2		)	(101		)	(8		)
Favorable impact to operating expense	34			146			37
Net favorable impact to operating income	$	32		$	45		$	29

Three Months Ended September 30, 2018 Nine Months Ended September 30, 2018
(In millions)
(Unfavorable) favorable impact to net revenues (exclusive of hedging impact) $ (30 ) $ 186
Hedging impact 10
(63 )
(Unfavorable) favorable impact to net revenues (20 ) 123
Favorable (unfavorable) impact to operating expense 23
(61 )
Net favorable impact to operating income $ 3
$ 62



	Three Months Ended March 31, 2019
	(In millions)
Unfavorable impact to net revenues (exclusive of hedging impact)	$	(116	)
Hedging impact	52
Unfavorable impact to net revenues	(64		)
Favorable impact to operating expense	62
Net unfavorable impact to operating income	$	(2	)

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.

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We also use a foreign currency exchange contract, designated as a net investment hedge, to reduce the foreign currency exchange risk related to our investment in a foreign subsidiary. Gains and losses associated with this instrument will remain in accumulated other comprehensive income until the foreign subsidiary is sold or substantially liquidated.

Additionally, in connection with our services that are paid for in multiple currencies, we generally set our foreign currency exchange rates daily and may face financial exposure if we incorrectly set our foreign currency exchange rates or as a result of fluctuations in foreign currency exchange rates between the times that we set our foreign currency exchange rates. Given that we also have foreign currency exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries, we have an additional foreign currency exchange exposure management program whereby we use foreign currency exchange contracts to offset the impact of foreign currency exchange rate movements on our assets and liabilities. 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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Financial Results

Net Revenues

Our revenues are classified into the following two categories:

•

Transaction revenues: Net transaction fees charged to merchants and consumers on a transaction basis primarily based on the volume of activity, or ~~TPV (defined below)~~Total Payment Volume (TPV), completed on our Payments Platform. Growth in TPV is directly impacted by the number of payment transactions that we enable on our Payments Platform. Payment transactions are the total number of payments, net of payment reversals, successfully completed through our Payments Platform or enabled by PayPal via a partner payment solution, not including gateway-exclusive transactions. We earn additional fees on transactions ~~settled in foreign currencies~~where we perform currency conversion, when we enable cross-border transactions (i.e., transactions where the merchant and consumer are in different countries)., to facilitate the instant transfer of funds for our customers from their PayPal or Venmo account to their debit card or bank account, and other miscellaneous fees.

•

Other value added services: Net revenues derived primarily from revenue earned through partnerships, 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 PayPal credit portfolio of loans receivable, gain on sale of participation interest in certain loans and advances, and interest earned on certain PayPal customer account balances.

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

•

Anactive account is an account registered directly with PayPal or a platform access partner that has completed a transaction on our Payments Platform or through our Honey Platform, not including gateway-exclusive transactions, within the past 12 months. A platform access partner is a third party whose customers are provided access to PayPal’s Payments Platform through such third party’s login credentials. The number of active accounts provides management with additional perspective on the growth of accounts across our Payments and Honey Platforms as well as the overall scale of our platforms. The acquisition of Honey contributed approximately 10.2 million new active accounts on the date of acquisition.


•	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-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 the 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 Revenues Analysis

The components of our net revenues for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows:


	Three Months Ended September 30,				Percent Increase/(Decrease)			Nine Months Ended September 30,								Percent Increase/(Decrease)		Three Months Ended March 31,							Percent Increase/(Decrease)
	2019		2018				2019				2018				2020				2019						Percent Increase/(Decrease)
	(In millions, except percentages)																	(In millions, except percentages)
Transaction revenues	$	3,955	$	3,343	Percent Increase/(Decrease)	18	%		$	11,564			$	9,858		Percent Increase/(Decrease)			17	%	$	4,215		$	3,731		13	%
Other value added services	423		340		24	%		1,247				1,367				(9	)%	403				397			2	%
Net revenues	$	4,378	$	3,683	19	%		$	12,811			$	11,225			14	%	$	4,618			$	4,128		12	%

Transaction revenues

Transaction revenues grew by ~~$612~~$484 million, or ~~18%, and $1.7 billion, or 17%~~13%, for the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period of the prior ~~year, respectively, due primarily~~year. The increase was mainly attributable to ~~growth in TPV, mainly from~~ our PayPal, Braintree and Venmo products and services, due primarily to growth in TPV and the number of payment transactions, both of which resulted primarily from an increase in our active accounts. ~~Acquisitions completed in 2018~~Fees charged to facilitate instant transfer of funds for our customers contributed approximately ~~two percentage points and~~ one percentage point to the growth rate of transaction ~~revenues~~revenues.

The current macroeconomic environment as a result of the COVID-19 outbreak has adversely impacted consumer and merchant spending and payments activity generally, and specifically in the ~~three~~travel and ~~nine months ended September 30, 2019, respectively.~~

~~Table~~events verticals and cross-border ecommerce. However, we have experienced strong growth in online retail, gaming, and food volume, partially offsetting this decline. Although the duration and severity of ~~Contents~~

the impacts of COVID-19 are unknown, currently we expect that we will continue to experience adverse impacts to our transaction revenue growth rate in affected verticals for the remainder of the year.

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


	Three Months Ended September 30,						Percent Increase/(Decrease)		Nine Months Ended September 30,						Percent Increase/(Decrease)		Three Months Ended March 31,						Percent Increase/(Decrease)
	2019			2018			Percent Increase/(Decrease)		2019			2018			Percent Increase/(Decrease)		2020			2019			Percent Increase/(Decrease)
	(In millions, except percentages)																(In millions, except percentages)
Active accounts⁽¹⁾	295			254			16	%	295			254			16	%	325			277			17	%
Number of payment transactions⁽²⁾	3,090			2,463			25	%	8,901			7,004			27	%	3,261			2,838			15	%
Payment transactions per active account⁽³⁾	39.8			36.5			9	%	39.8			36.5			9	%	39.4			37.9			4	%
TPV⁽⁴⁾	$	178,670		$	143,004		25	%	$	512,521		$	414,771		24	%	$	190,567		$	161,492		18	%
Percent of cross-border TPV	17		%	19		%	**		18		%	20		%	**		17		%	18		%	**

All amounts in ~~tables~~the table are rounded to the nearest million, except as otherwise noted. As a result, certain amounts may not recalculate using the rounded amounts provided.

⁽¹⁾~~Reflects~~Three months ended March 31, 2020 include 10.2 million active accounts ~~as of~~contributed by Honey on the end of the applicable period. An active account is an account registered directly with PayPal or a platform access partner that has completed a transaction on our Payments Platform, not including gateway-exclusive transactions, within the past 12 months.

⁽²⁾ 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.

⁽³⁾~~Number of payment transactions per active account reflects the total number of payment transactions within the previous 12 month period, divided by active accounts at the end of the period.~~

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

** Not meaningful

Transaction revenues grew more slowly than both TPV and the number of payment transactions for the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period in the prior year, due to a higher proportion of P2P transactions (primarily from our ~~PayPal~~Venmo and ~~Venmo~~PayPal products) from which we earn lower fees, and a lower proportion of cross border transactions, partially offset by foreign currency exchange hedging gains. Changes in prices charged to our customers did not significantly impact transaction revenue growth for ~~both~~ the three ~~and nine~~ months ended ~~September 30, 2019.~~March 31, 2020.

Other value added services

For the three months ended ~~September 30, 2019,~~March 31, 2020, net revenues from other value added services increased ~~$83~~$6 million, or ~~24%~~2%, compared to the same period in the prior ~~year, due~~year. The increase was primarily attributable to ~~increases~~incremental revenues from our acquisition of Honey, which contributed approximately 11 percentage points to the growth rate, an increase in ~~revenue share with Synchrony (discussed below),~~ interest and fee income earned on our merchant loans and advances receivable, and ~~interest earned on customer balances. These increases were~~an increase in our revenue share with Synchrony Bank (“Synchrony”). This growth was partially offset by a decrease in revenue earned from transition servicing activities provided to Synchrony which ~~ended~~terminated in the second quarter of ~~2019.~~

~~For the nine months ended September 30,~~ 2019, ~~net revenues from other value added services decreased $120 million, or 9%, compared to the same period in the prior year, due primarily to lower interest~~ and ~~fee income earned on our consumer loans receivable driven by the sale of our U.S. consumer credit receivables portfolio in July 2018. The~~a decline ~~was partially offset by an increase in revenue share with Synchrony (discussed below), an increase in interest and fee income earned on our merchant loans and advances receivable, and growth~~ in interest earned on customer ~~balances. Other value added services revenues also benefited~~balances resulting from an increase of approximately $113 million for the nine months ended September 30, 2019, due to revenue earned from transition servicing activities provided to Synchrony, which ended in the second quarter of 2019.lower interest rates.

~~Acquisitions completed in 2018 contributed approximately six percentage points and five percentage points to the growth rate~~

Table of ~~other value added services in the three and nine months ended September 30, 2019, respectively.~~ Contents

The total gross consumer and merchant loans and interest receivable balance was ~~$3.7~~$4.5 billion as of ~~September 30, 2019~~March 31, 2020 and ~~$2.3~~$3.1 billion as of ~~September 30, 2018,~~March 31, 2019, respectively, reflecting a year-over-year increase of ~~64%~~46% driven primarily by growth in our merchant loan ~~portfolios.~~receivable portfolio.

In ~~November 2017,~~response to the COVID-19 outbreak, we ~~reached an agreement~~have taken both proactive and reactive measures to ~~sell~~support our ~~U.S. consumer~~merchants and consumers that have loans and interest receivables due to us under our credit ~~receivables portfolio~~product offerings. These measures include providing payment holidays in certain cases, which is expected to adversely impact the recognition of interest and fee income in future periods. Given the uncertainty surrounding the COVID-19 outbreak, and the ultimate impact it may have on the financial condition of our merchants and consumers, the extent of these types of actions and the impact they may have on our interest and fee income is not determinable. In addition, consumers that have outstanding loans and interest receivable due to Synchrony ~~to free up balance sheet capacity~~may be offered similar support, and ~~cash flow for other uses and mitigate balance sheet risk. Following the closing of this transaction~~ultimately may 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 recorded~~may result in ~~net revenues~~a decrease in our revenue share earned from ~~other value added services.~~

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Synchrony in future periods.

Operating Expenses

Beginning with the first quarter of 2019, we reclassified certain operating expenses within our condensed consolidated statements of income. Prior period amounts were reclassified to conform to this presentation. These changes have no impact on our previously reported consolidated net income for prior periods, including total operating expenses, financial position, or cash flows for any periods presented. For additional information, see Note 1—“Overview and Summary of Significant Accounting Policies” in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q. Growth rates presented below are calculated based upon the reclassified prior period amounts.

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


	Three Months Ended September 30,						Percent Increase/(Decrease)			Nine Months Ended September 30,								Percent Increase/(Decrease)		Three Months Ended March 31,								Percent Increase/(Decrease)
	2019			2018					2019				2018				2020				2019							Percent Increase/(Decrease)
	(In millions, except percentages)																			(In millions, except percentages)
Transaction expense	$	1,701		$	1,366		Percent Increase/(Decrease)	25	%		$	4,877			$	4,003		Percent Increase/(Decrease)			22	%	$	1,739			$	1,549		12	%
Transaction and loan losses	340			295			15	%		999				934				7	%
Transaction and credit losses																				591				341				73	%
Customer support and operations⁽¹⁾	390			350			11	%		1,177				1,030				14	%	399				388				3	%
Sales and marketing⁽¹⁾	316			325			(3	)%		1,001				913				10	%	371				329				13	%
Technology and development⁽¹⁾	533			452			18	%		1,527				1,341				14	%	605				511				18	%
General and administrative⁽¹⁾	401			377			6	%		1,239				1,111				12	%	486				419				16	%
Restructuring and other charges	—			28			(100	)%		71				297				(76	)%	29				73				(60	)%
Total operating expenses	$	3,681		$	3,193		15	%		$	10,891			$	9,629			13	%	$	4,220			$	3,610			17	%
Transaction expense rate⁽²⁾⁽¹⁾	0.95		%	0.96		%	**			0.95		%		0.97		%		**		0.91		%		0.96		%		**
Transaction and loan loss rate⁽³⁾	0.19		%	0.21		%	**			0.19		%		0.23		%		**
Transaction and credit loss rate⁽²⁾																				0.31		%		0.21		%		**

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

⁽²⁾Transaction expense rate is calculated by dividing transaction expense by TPV.

⁽³⁾⁽²⁾Transaction and ~~loan~~credit loss rate is calculated by dividing transaction and ~~loan~~credit losses by TPV.

** Not meaningful

Transaction Expense

Transaction expense increased by ~~$335~~$190 million, or ~~25%, and $874 million, or 22%~~12%, in the three ~~and nine~~ months ended ~~September 30, 2019, respectively,~~March 31, 2020, compared to the same ~~periods~~period of the prior year, due primarily to the increase in TPV of ~~25% and 24%, for the three and nine months ended September 30, 2019, respectively.~~18%. The decrease in transaction expense rate for the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period of the prior year, was due primarily to changes in product ~~and funding~~ mix. ~~Acquisitions completed in 2018 contributed approximately one percentage point to the growth rate of transaction expense in both the three and nine months ended September 30, 2019.~~

Our transaction expense rate is impacted by changes in product mix, regional mix, funding mix, and assessments charged by payment processors and other financial institutions when we draw funds from a customer’s credit or debit card, bank account, or other funding sources. The cost of funding a transaction with a credit or debit card is generally higher than the cost of funding a transaction from a bank or through internal sources such as a PayPal account balance, Venmo account balance, or PayPal Credit. For each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ approximately 2% of TPV was funded with PayPal Credit. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, approximately ~~40%~~39% and 41% of TPV, respectively, was generated outside of the U.S.~~, respectively. For the three and nine months ended September 30, 2018, approximately 42% and 43% of TPV was generated outside of the U.S., respectively.~~ As we expand the availability and presentation of alternative funding sources to our customers, our funding mix may change, which could increase or decrease our transaction expense rate.

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Transaction and ~~Loan~~Credit Losses

The components of our transaction and ~~loan~~credit losses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows:


	Three Months Ended September 30,						Percent Increase/(Decrease)			Nine Months Ended September 30,								Percent Increase/(Decrease)		Three Months Ended March 31,								Percent Increase/(Decrease)
	2019			2018					2019				2018				2020				2019							Percent Increase/(Decrease)
	(In millions, except percentages)																			(In millions, except percentages)
Transaction losses	$	256		$	259		Percent Increase/(Decrease)	(1	)%		$	789			$	764		Percent Increase/(Decrease)			3	%	$	247			$	286		(14	)%
Loan losses	84			36			133	%		210				170				24	%
Transaction and loan losses	$	340		$	295		15	%		$	999			$	934			7	%
Credit losses																				344				55				525	%
Transaction and credit losses																				$	591			$	341			73	%
Transaction loss rate⁽¹⁾	0.14		%	0.18		%				0.15		%		0.18		%				0.13		%		0.18		%

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

Transaction losses decreased by $3$39 million, or 1%14%, ~~and increased by $25 million, or 3%~~ in the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period of the prior year. The increase in transaction losses resulting from the growth in TPV for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 was offset by benefits realized through improvements in risk management capabilities, which also contributed to a decrease in our transaction loss ~~rates~~rate in the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period of the prior year. The duration and severity of the impacts of the COVID-19 outbreak are unknown. The negative impact on macroeconomic conditions could increase the risk of merchant bankruptcy, business failure, or other business interruption which may result in an adverse impact on our transaction losses growth rate, particularly for merchants that sell goods or services in advance of the date of their delivery or use.

~~Loan~~Credit losses increased by ~~$48~~$289 million, or ~~133%, and $40 million, or 24%~~525%, in the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period of the prior year, due primarily to an increase in ~~loan~~provisions for our loans and interest receivable portfolio associated with the macroeconomic forecasts reflecting the anticipated impact of COVID-19, which was factored into the determination of our lifetime expected credit losses. Our estimate of the macroeconomic impact on lifetime expected credit losses ~~resulting~~is most significantly impacted by projected unemployment trends, which directly correlate to the forecast of loans and interest receivables that will charge off in the future. If the actual unemployment trends vary significantly from the projections as of March 31, 2020, the actual value of accounts that charge off may fluctuate significantly, impacting credit losses recognized in future periods. Credit losses for the three months ended March 31, 2020, primarily consisted of approximately $227 million of provision associated with the macroeconomic forecasts reflecting the anticipated impact of COVID-19 and approximately $95 million of provision associated with the growth in our merchant ~~loans~~ and ~~advances, and international~~ consumer loans receivable balances, offset by the recognition of losses in the three and nine months ended September 30, 2018 associated with U.S. consumer credit receivable balances that were not subject to the sale agreement with Synchrony. Acquisitions completed in 2018 contributed approximately three percentage points to the growth rate of loan losses for both the three and nine months ended September 30, 2019.balances.

The consumer loans and interest ~~receivable~~receivables balance as of ~~September 30,~~March 31, 2020 and March 31, 2019 ~~and September 30, 2018~~ was ~~$1.0~~$1.4 billion and ~~$560~~$792 million, respectively, representing a year-over-year increase of ~~84%~~74% driven by growth in international markets. Approximately 90% and 93% of our consumer loans ~~receivables~~receivable outstanding as of ~~both September 30,~~March 31, 2020 and March 31, 2019, ~~and September 30, 2018,~~respectively, were due from consumers in the U.K.

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


	September 30,				March 31,
	2019		2018		2020		2019
Percent of consumer loans and interest receivables current(1)	93.7	%	94.6	%	96.4	%	97.2	%
Percent of consumer loans and interest receivables > 90 days outstanding⁽¹⁾	2.1	%	1.6	%
Percent of consumer loans and interest receivables > 90 days outstanding^(1),(2)					1.5	%	1.1	%
Net charge off rate⁽²⁾⁽³⁾	4.3	%	3.5	%	3.6	%	3.3	%

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

⁽²⁾Represents percentage of balances which are 90 days past the billing date to the consumer.

⁽²⁾⁽³⁾ Net charge off rate is the annual ratio of net credit losses, excluding fraud losses, on consumer loans receivables as a percentage of the average daily amount of consumer loans and interest receivables balance during the period.

We offer business financing solutions to certain small and medium-sized merchants. Total merchant loans, advances, and interest and fees receivable outstanding, net of participation interest sold, as of ~~September 30, 2019~~March 31, 2020 were ~~$2.6~~$3.0 billion, compared to ~~$1.6~~$2.2 billion as of ~~September 30, 2018,~~March 31, 2019, representing a year-over-year increase of ~~63%~~38%. The increase in merchant loans, advances, and interest and fees receivable outstanding was due primarily to the growth in our PayPal Business Loans (“PPBL”) product and an increase in the availability of our PayPal Working Capital (“PPWC”) credit product. Approximately 84% and 9%10% of our merchant receivables outstanding as of ~~September 30, 2019~~March 31, 2020 were due from merchants in the U.S. and U.K., respectively, as compared to ~~87%~~85% and 10%~~, respectively,~~ as of ~~September 30, 2018.~~March 31, 2019.

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

September 30,
2019
2018⁽¹⁾
Merchant loans and advances
Percent of merchant receivables within original expected or contractual repayment period 90.5 % 90.7 %
Percent of merchant receivables > 90 days outstanding after the end of original expected or contractual repayment period 3.8 % 3.8 %



	March 31,
	2020		2019
Percent of merchant receivables within original expected or contractual repayment period⁽¹⁾	89.6	%	91.1	%
Percent of merchant receivables > 90 days outstanding after the end of original expected or contractual repayment period⁽¹⁾	4.2	%	3.7	%
Net charge off rate⁽²⁾	9.7	%	6.8	%

⁽¹⁾~~Excludes $25 million~~ Includes the impact of a 30-day payment holiday, which was provided by the company as a result of the economic impacts of COVID-19.

⁽²⁾ Net charge off rate is the annual ratio of net credit losses, excluding fraud losses, on merchant loans ~~receivable acquired~~and advances as ~~part~~a percentage of ~~our acquisition~~the average daily amount of ~~iZettle in September 2018.~~merchant loans, advances, and interest and fees balance during the period.

~~Modifications~~The increase in the net charge off rate for merchant receivables at March 31, 2020 as compared to March 31, 2019 was primarily attributable to significant expansion of our PPBL products in 2019, which have incurred a higher charge-off rate than our other merchant loan and advance products, and a decrease in the volume of TPV processed on our Payments Platform for certain merchants, adversely impacting the delinquency status of loans outstanding under our PPWC portfolio.

During the three months ended March 31, 2020, modifications to the acceptable risk parameters of our ~~PayPal Credit~~credit products ~~for~~in response to the ~~periods presented did not~~anticipated impacts of the COVID-19 outbreak resulted in the implementation of a number of risk mitigation strategies, including reduction of maximum loan size, tightening eligible terms, and a shift from automated to manual underwriting of loans and advances. The impact of COVID-19 to the economic environment is uncertain, but the longer the duration of the outbreak, the more likely it is to have a ~~material~~materially adverse impact on our ~~loans~~borrowing base, which is primarily comprised of small and ~~interest receivables.~~medium-sized merchants, resulting in a reduction in the volume of lending activity during the remainder of the year. For additional information, see ~~Note~~“Note 11—“Loans and Interest Receivable” in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Customer Support and Operations

Customer support and operations 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.

~~Customer support and operations~~ expenses increased by ~~$40~~$11 million, or ~~11%, and $147 million, or 14%~~3%, in the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period of the prior year, due primarily to an increase in contractors and consulting costs and employee-related expenses in our operations function that support the growth of our active accounts and payment transactions, and an increase in depreciation and amortization expenses associated with the applications that we use to support our customers and underlying data in our operations centers. Acquisitions completed in 2018 collectively contributed approximately three percentage points and four percentage points to the growth rate of customer support and operations expenses for the three and nine months ended September 30, 2019, respectively.transactions.

Sales and Marketing

Sales and marketing ~~includes costs incurred for customer acquisition, business development, advertising, and marketing programs.~~

~~Sales and marketing~~ expenses ~~decreased~~increased by $9$42 million, or 3%13%, in the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the same period of the prior year, due primarily to ~~lower~~higher spend on marketing programs, partially offset by ~~increases~~a decline in ~~amortization~~consulting services. Our acquisitions of ~~acquired intangibles,~~Honey and employee-related expenses. Sales and marketing expenses increased by $88 million, or 10%, in the nine months ended September 30, 2019, compared to the same period of the prior year, due primarily to increases in amortization of acquired intangibles, employee-related expenses, and consulting services, partially offset by lower spend on marketing programs. Acquisitions completed in 2018GoPay collectively contributed approximately ~~10 percentage points and 12~~19 percentage points to the growth rate of sales and marketing ~~expenses for the three and nine months ended September 30, 2019, respectively.~~expenses.

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 by ~~$81~~$94 million, or 18%, ~~and $186 million, or 14%,~~ in the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period of the prior year, due primarily to increases in employee-related expenses, amortization of acquired intangibles, and data center and cloud computing services utilized in delivering our ~~products, partially offset by a decline in costs related to contractors~~products. Our acquisitions of Honey and ~~consultants. Acquisitions completed in 2018~~GoPay collectively contributed approximately ~~five~~15 percentage points to the growth rate of technology and development expenses for ~~both~~ the three ~~and nine~~ months ended ~~September 30, 2019.~~March 31, 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.~~

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~~General and administrative~~ expenses increased by ~~$24~~$67 million, or ~~6%, and $128 million, or 12%~~16%, in the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period of the prior year, due primarily to increases in employee-related expenses, facilities costs, and depreciation and amortization associated with systems and tools used in our general and administrative functions. These increases were partially offset by a decrease in professional ~~service~~services expenses including those ~~related~~attributable to acquisition related transaction expense, employee-related expenses, ~~incurred in the three~~ and ~~nine months ended September 30, 2018. Acquisitions completed in 2018~~expenses related to contingencies. Our acquisitions of Honey and GoPay collectively contributed approximately ~~four~~12 percentage points to the growth rate of general and administrative expenses for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

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Restructuring and Other Charges

Restructuring and other charges decreased by ~~$28~~$44 million, ~~and $226 million in the three and nine months ended September 30, 2019, respectively, compared to the same periods of the prior year. The decrease~~or 60%, in the three months ended September 30, 2019 was driven by net loss incurred due to the sale of our U.S. consumer credit receivables portfolio in the three months ended September 30, 2018. A total of $244 million of the decrease for the nine months ended September 30, 2019,March 31, 2020, compared to the same period of the prior year, ~~was attributable to~~primarily driven by a decline in restructuring charges.

During the ~~sale~~first quarter of ~~our U.S. consumer credit receivables portfolio in July 2018, prior to~~2020, 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 increase~~resulted in restructuring charges of ~~$53 million for the nine months ended September 30, 2019, compared~~$29 million. The approved strategic reduction in 2020 is part of a multiphase process to the same periods of the prior year. In the nine months ended September 30, 2019, we also recorded a gain of $7 million representing an adjustment to the loss from additional expenses incurred associatedreorganize our workforce concurrently with the ~~sale~~redesign of our ~~U.S. consumer credit portfolio~~operating structure, which we expect will span multiple quarters. We primarily incurred employee severance and benefits costs under the 2020 strategic reduction, as well as other associated consultancy costs. This strategic reduction is expected to ~~Synchrony.~~be substantially completed by the end of 2020.

During 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 ~~are~~were intended to better align our teams to support key business priorities, and ~~also include~~included the transfer of certain operational functions between geographies, as well as the impact of the transition of servicing activities provided to Synchrony, which terminated in the second quarter of 2019. We primarily incurred employee severance and benefits expenses under the 2019 strategic reductions, which ~~is expected to be~~were substantially completed by the ~~end~~first quarter of 2019. The estimated annual employee related costs associated with the impacted workforce is approximately $175 million. The majority of the reduction in costs associated with the impacted workforce is expected to be reinvested in the business.

We incurred employee and severance benefit expenses, including charges related to winding down TIO’s operations, under the 2018 strategic reduction, which was substantially completed by the end of 2018.2020.

Other Income (Expense), Net

Other income (expense), net decreased ~~$256 million and increased $130~~$334 million in the three ~~and nine~~ months ended ~~September 30, 2019, respectively,~~March 31, 2020, compared to the same ~~periods~~period of the prior year.

The decrease in the three months ended ~~September 30, 2019~~March 31, 2020 was primarily driven by net unrealized losses on strategic investments due to unfavorable changes in fair value related to our marketable equity securities, partially offset by the favorable impact of observable price changes related to our non-marketable equity securities, net of impairments, which collectively contributed to an increase in net unrealized losses of ~~$228~~$304 million during the three months ended ~~September 30, 2019,~~March 31, 2020, as compared to ~~the same period of the prior year.~~

~~The increase in the nine months ended September 30, 2019 was primarily driven by~~ net unrealized gains ~~on strategic investments due to favorable changes~~ in fair value related to our marketable equity securities and the impact of observable price changes related to our non-marketable equity securities, which collectively contributed to an increase in net unrealized gains of $139 million during the nine months ended September 30, 2019, compared to the same period of the prior year.

Income Tax Expense

Our effective income tax rate was approximately 5%68% and ~~18%~~7% for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The ~~decrease~~increase in our effective income tax rate for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the same period of the prior year, was due primarily to tax expense related to the intra-group transfer of intellectual property, partially offset by an increase in ~~the~~ tax benefits associated with discrete tax ~~adjustments, and a favorable shift in earnings in~~adjustments.

Our calculation of income tax expense for the three months ended ~~September 30, 2019.~~

~~Table~~March 31, 2020, is dependent in part on forecasts of ~~Contents~~

~~Our effective income~~full year results. The impact of the COVID-19 outbreak to the economic environment is uncertain and may change these forecasts, which could materially impact tax ~~rate was approximately 9% and 13%~~expense as reported for the ~~nine~~three months ended September 30, 2019 and 2018, respectively. The decrease in our effective income tax rate for the nine months ended September 30, 2019, compared to the same period of the prior year, was due primarily to incremental tax expense related to the Tax Act in the nine months ended September 30, 2018, and a favorable shift in earnings in the nine months ended September 30, 2019.March 31, 2020.

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 ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:

September 30, 2019 December 31, 2018
(In millions)
Cash, cash equivalents, and investments⁽¹⁾⁽²⁾
$ 11,378
$ 9,710



	March 31, 2020		December 31, 2019
	(In millions)
Cash, cash equivalents, and investments⁽¹⁾⁽²⁾	$	10,779	$	11,722

⁽¹⁾Excludes assets related to funds receivable and customer accounts of $22.8 billion and $22.5 billion ~~and $20.1 billion~~ at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

⁽²⁾Excludes total restricted cash of ~~$67~~$74 million and ~~$77~~$64 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, and strategic investments of $~~1.8~~1.7 billion and ~~$293 million~~$1.8 billion as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

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Foreign Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments held by our foreign subsidiaries were ~~$7.7~~$6.0 billion as of ~~September 30, 2019~~March 31, 2020 and ~~$8.7~~$7.2 billion at December 31, ~~2018,~~2019, or ~~67%~~56% and ~~89%~~61% of our total cash, cash equivalents, and investments as of those respective dates. At December 31, ~~2018,~~2019, all of our cash, cash equivalents, and investments held by foreign subsidiaries were subject to U.S. taxation under Subpart F, ~~GILTI,~~Global Intangible Low Taxed Income (“GILTI”), or the one-time transition ~~tax.~~tax under the Tax Cuts and Jobs Act of 2017. 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

OnIn September 26, 2019, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $5.0 billion (collectively referred to as the “Notes”). Proceeds from the issuance of these Notes may be used for general corporate purposes, which may include funding the repayment or redemption of outstanding debt, share repurchases, ongoing operations, capital expenditures, and possible acquisitions of businesses, assets, or strategic investments.

~~On September 11,~~ 2019, we entered into a credit agreement (the “Credit Agreement”) that provides for an unsecured $5.0 billion, five-year revolving credit facility that includes a $150 million letter of credit sub-facility and a $500 million swingline sub-facility, with available borrowings under the revolving credit facility reduced by the amount of any letters of credit and swingline borrowings outstanding from time to time. ~~Additionally, on September 11, 2019,~~In March 2020, we ~~entered into a 364-day credit agreement (“364-Day~~drew down $3.0 billion under the Credit ~~Agreement”) that provides for an unsecured $1.0 billion 364-day revolving credit facility.~~Agreement. As of ~~September 30, 2019, no borrowings were~~March 31, 2020, $3.0 billion was outstanding under the Credit Agreement at a weighted average interest rate of 2.19%. The majority of the proceeds were held as cash and ~~the 364-Day Credit Agreement, and as such, $6.0 billion of~~cash equivalents. We increased our borrowing ~~capacity was available for the purposes permitted by~~under the Credit Agreement to increase our significant cash position and provide additional financial flexibility given the ~~364-Day Credit Agreement, subject to customary conditions to borrowing. Upon our entry into the Credit Agreement, the credit agreement that we entered into~~heightened uncertainty in the ~~third quarter~~global economy and volatility in financial markets resulting from the outbreak of ~~2015 that provided for an unsecured $2.0 billion, five-year revolving credit facility was terminated.~~

InCOVID-19. We plan to use the ~~fourth quarter of 2018, we entered into an amended credit agreement (“Amended Credit Agreement”) which amended and restated~~proceeds in its entirety the previous agreement entered into in 2017. The Amended Credit Agreement provides for an unsecured $5.0 billion, 364-day delayed-draw term loan credit facility, which was available in up to four separate borrowings until April 6, 2019. As of December 31, 2018, $2.0 billion was outstanding under the Amended Credit Agreement. On April 5, 2019, the Company drew down an additional $500 million under the Amended Credit Agreement. On September 26, 2019, the Amended Credit Agreement was terminated and we repaid $2.5 billion of borrowings outstanding under such agreement.a manner consistent with our previously disclosed capital allocation strategy.

We ~~also~~ maintain ~~committed and~~ uncommitted credit facilities in various regions throughout the world, with borrowing capacity of approximately ~~$230~~$130 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.~~purposes. Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings.

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As of ~~September 30, 2019,~~March 31, 2020, substantially all of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing.

Other than as described above, there are no significant changes or amounts outstanding related to the credit agreements disclosed in our 2019 Form 10-K. For additional information, see ~~Note~~“Note 12—“Debt” in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

We have a cash pooling ~~arrangement~~arrangements with a financial institution for cash management purposes. ~~The~~Each arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the financial institution (“Aggregate Cash Deposits”). ~~The~~Each arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income under ~~these arrangements.~~each arrangement. As of ~~September 30, 2019,~~March 31, 2020, we had a total of ~~$4.2~~$3.2 billion in cash withdrawals offsetting our ~~$4.2~~$3.2 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling ~~arrangement.~~arrangements.

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Liquidity for Credit Portfolio Growth

Growth in the portfolio of loan receivables increases our liquidity needs and any ~~failure~~inability to meet those liquidity needs could adversely affect our business. We continue to evaluate partnerships and third party sources of funding offor our credit 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. As of ~~September 30, 2019,~~March 31, 2020, the cumulative amount approved by management to be designated for credit activities aggregated to ~~$1.5~~$2.0 billion and represented approximately ~~24%~~32% of European customer balances potentially available for 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 U.S. Government’s Paycheck Protection Program, which is designed to provide a direct incentive for small businesses to keep their workers on the payroll during the COVID-19 outbreak. Loans made under this program are funded by an independent chartered financial institution we partner with and the related receivables will not be purchased by PayPal. We will receive a fee for providing origination and loan servicing for the loans and will retain operational risk related to those activities. Through May 5, 2020, originations facilitated through PayPal under this program were approximately $1.3 billion.

Credit Ratings

As of ~~September 30, 2019,~~March 31, 2020, we continue to be rated investment grade by Standard and Poor’s Financial Services, LLC and Fitch Ratings, Inc. We expect that these credit rating agencies will continue to monitor our performance, including our capital structure and results of operations. Our goal is to be rated investment grade, but as circumstances change, there are factors that could result in our credit ratings being downgraded or put on a watch list for possible downgrading. If that were to occur, it could increase our borrowing rates, including the interest rate on loans under our credit agreements.

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 condensed consolidated financial statements included in this report, our transaction loss rates ranged between ~~0.14%~~0.13% 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 outbreak are unknown. Its negative impact on macroeconomic conditions could increase the risk of merchant bankruptcy, business failure, or other business interruption, which may result in an adverse impact on our transaction losses growth rate, particularly for merchants that sell goods or services in advance of the date of their delivery or use.

Stock Repurchases and Acquisitions

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we repurchased approximately ~~$1.1 billion~~$800 million of our common stock ~~including approximately $350 million~~ in the open market ~~and approximately $750 million pursuant to the accelerated share repurchase agreement~~ under our stock repurchase ~~program~~programs 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 ~~September 30, 2019,~~March 31, 2020, a total of approximately ~~$374 million and $10~~$9.3 billion remained available for future repurchases of our common stock under our ~~April 2017 and~~ July 2018 stock repurchase ~~programs, respectively.~~program.

In January 2020, we completed our acquisition of Honey for approximately $3.6 billion in cash and approximately $400 million in assumed restricted stock, restricted stock units, and options, subject to vesting conditions. 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 condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

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Other Considerations

Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating, our financial performance, and global credit market conditions, as well as a broad range of other ~~factors.~~factors including those related to the COVID-19 outbreak discussed elsewhere in this Form 10-Q. In addition, our liquidity, access to capital, and borrowing costs could also be negatively impacted by the outcome of any of the legal or regulatory proceedings to which we are a party. See Part I, Item 1A, Risk Factors in our ~~2018~~2019 Form 10-K, as supplemented and, to the extent inconsistent, superseded below in Part II, Item 1A, Risk Factors in this Form 10-Q, as well as ~~Note~~“Note 13—“Commitments and Contingencies” to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for additional discussion of these and other risks ~~facing~~that 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 ~~share~~stock repurchase programs, or reduce our cost of capital.

Cash Flows

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


	Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2020			2019
	(In millions)						(In millions)
Net cash provided by (used in):
Operating activities	$	3,297		$	4,349		$	1,504		$	1,027
Investing activities	(5,334		)	717			(2,568		)	(4,860		)
Financing activities	3,837			507			2,241			1,502
Effect of exchange rates on cash, cash equivalents, and restricted cash	(49		)	(89		)	(178		)	1
Net increase in cash, cash equivalents, and restricted cash	$	1,751		$	5,484
Net increase (decrease) in cash, cash equivalents, and restricted cash							$	999		$	(2,330	)

Operating Activities

We generated cash from operating activities of ~~$3.3~~$1.5 billion in the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 primarily due to operating income of ~~$1.9 billion, adjusted~~$398 million, as well as adjustments for non-cash expenses including: provision for transaction and credit losses of $591 million, depreciation and amortization of $293 million, and stock-based compensation of ~~$1.4 billion, and non-cash expenses related to provision~~$283 million. Net income was also adjusted for ~~transaction and loan losses of $999 million. The cash generated from operating activities was reduced by~~ net unrealized ~~gains~~losses on our strategic investments of ~~$170~~$151 million and changes in other assets and liabilities of ~~$470 million, primarily related to actual cash transaction losses incurred during the period, deferred income taxes of $122 million, and accounts receivable of $103~~$106 million.

We generated cash from operating activities of ~~$4.3~~$1.0 billion in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 primarily due to operating income of ~~$1.6 billion, and the positive impact of $1.4 billion of changes in loans and interest receivable held for sale, net. Adjustments~~$518 million, as well as adjustments for non-cash expenses ~~of depreciation and amortization and stock-based compensation were approximately $1.2 billion during the nine months ended September 30, 2018. Adjustments for non-cash expenses related to~~including: provision for transaction and ~~loan~~credit losses ~~were $934~~of $341 million, stock-based compensation of $247 million, and ~~cost basis adjustments to loans~~depreciation and ~~interest receivable held~~amortization of $230 million. Net income was also adjusted for ~~sale were $244~~net unrealized gains on our strategic investments of $180 million, ~~during the nine months ended September 30, 2018. The cash generated from operating activities was negatively impacted by~~ changes in other assets and liabilities of ~~$623~~$227 million primarily related to actual cash transaction losses incurred during the period, and an increase in accounts receivable of ~~$133~~$96 million.

In the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ cash paid for income taxes, net was ~~$220~~$30 million and ~~$228~~$22 million, respectively.

Investing Activities

The net cash used in investing activities of ~~$5.3~~$2.6 billion in the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was due primarily to acquisitions (net of cash acquired) of $3.6 billion, purchases of investments of ~~$19.8~~$3.6 billion, changes in funds receivable from customers of ~~$1.3 billion,~~$401 million, changes in principal loans receivable, net of ~~$1.1 billion,~~$386 million, and purchases of property and equipment of ~~$530~~$206 million. These cash outflows were partially offset by maturities and sales of investments of ~~$17.4~~$5.5 billion and proceeds from the sale of property and equipment of $119 million.

The net cash used in investing activities of $4.9 billion in the three months ended March 31, 2019 was due primarily to purchases of investments of $8.1 billion, changes in funds receivable from customers of $2.2 billion, changes in principal loans receivable, net of $357 million, and purchases of property and equipment of $218 million. These cash outflows were partially offset by maturities and sales of investments of $6.0 billion.

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We generated cash from investing activities of $717 million in the nine months ended September 30, 2018 due primarily to maturities and sales of investments of $15.9 billion and changes in principal loans receivable, net of $3.6 billion following the sale of our U.S. consumer credit receivables portfolio. These cash inflows were partially offset by purchases of investments of $15.6 billion, acquisitions of $2.1 billion (net of cash acquired), purchases of property and equipment of $599 million, and changes in funds receivable from customers of $427 million.

Financing Activities

We generated cash from financing activities of ~~$3.8~~$2.2 billion in the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 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 of $3.0 billion and changes in funds payable and amounts due to customers of ~~$2.4 billion.~~$457 million. These cash inflows were partially offset by ~~repayment of borrowings under our Amended Credit Agreement of $2.5 billion,~~ the repurchase of ~~$1.1 billion~~$800 million of our common stock under our stock repurchase programs and tax withholdings related to net share settlement of equity awards of ~~$473~~$402 million.

We generated cash from financing activities of ~~$507 million~~$1.5 billion in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 due primarily to ~~borrowings, primarily on our 2017 Credit Agreement, of $2.1 billion and~~ changes in funds payable and amounts due to customers of ~~$2.8 billion. These cash inflows were~~$2.6 billion partially offset by ~~cash outflows from~~ the repurchase of ~~$2.9 billion~~$756 million of our common stock under our stock repurchase programs, ~~repayments of borrowings under financing arrangements of $1.1 billion,~~ and tax withholdings related to net share settlement of equity awards of ~~$392~~$309 million.

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

Foreign currency exchange rates had a negative impact of $178 million on cash, cash equivalents, and restricted cash for the ~~nine~~three months ended ~~September 30, 2019 and 2018 of $49 million and $89 million, respectively, primarily~~March 31, 2020 due to the strengthening of the U.S. dollar against certain foreign currencies, primarily the Australian ~~dollar.~~dollar and, to a lesser extent, the Brazilian real.

Off-Balance Sheet Arrangements

As of ~~September 30, 2019,~~March 31, 2020, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Policies and Estimates

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 as described in our 2019 Form 10-K and as supplemented and, to the extent inconsistent, superseded within 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 our 2019 Form 10-K and as supplemented and, to the extent inconsistent, superseded within “Note 1—Overview and Summary of Significant Accounting Policies” to the condensed consolidated financial statements in this report.

A quantitative sensitivity analysis is provided where that information is reasonably available, can be reliably estimated, 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 credit losses include the expense associated with our customer protection programs, fraud, chargebacks, and credit losses associated with our loans receivable balances. Our transaction and credit losses fluctuate depending on many factors, including: total TPV, current and projected macroeconomic conditions, including unemployment rates and merchant insolvency events, changes to and usage of our customer protection programs, the impact of regulatory changes, and the credit quality of loans receivable arising from transactions funded with our credit products, which include our PayPal Credit consumer products and merchant loans and advances arising from our PPWC and PPBL products.

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We establish allowances for estimated transaction losses arising from processing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery of goods or services, buyer protection program claims, and account takeovers. Additions to the allowance, in the form of provisions, are reflected in transaction and credit losses on our condensed consolidated statements of income. The allowances are monitored regularly and are updated based on actual claims data. The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving loss payment patterns, the mix of transaction and loss types, as well as current and projected macroeconomic factors, as appropriate.

We also establish an allowance for loans and interest receivable, which represents our estimate of lifetime expected credit losses inherent in our portfolio of loans and interest receivable. This evaluation process is subject to numerous estimates and judgments. The allowance is primarily based on expectations of credit losses based on historical lifetime loss data as well as macroeconomic factors. Loss curves are generated using historical loss data for our loan portfolios and are applied to segments of each portfolio, categorized by geographic region, first borrowing vs. reuse, delinquency, and vintage, among other factors. 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 is most appropriate to the economic conditions applicable to a particular period. We utilize externally sourced macroeconomic scenario data to supplement our historical information due to the limited period in which our credit product offerings have been in existence. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our consumer and merchant receivables. Our revolving consumer receivables do not have a contractual term, however the reasonable and supportable forecast period we have included in our projected loss rates based on externally sourced data is approximately seven years. Our merchant receivables vary in contractual term, however the reasonable and supportable forecast period considered for projected loss rates is approximately 2.5 to 3.5 years, dependent upon the product. The allowance for loss against the interest and fees receivable is determined primarily by applying loss curves by geography, delinquency, and period of origination, among other factors.

Determining appropriate allowances for these losses 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 lifetime expected credit losses at the balance sheet date after incorporating the impact of externally sourced macroeconomic forecasts. These forecasts project scenarios for future unemployment and benchmark credit card charge-off rates. As of March 31, 2020, we utilized externally published projections indicating a forecasted peak unemployment rate over the reasonable and supportable period of approximately 9% in the second quarter of 2020, resulting in an overall principal and interest coverage ratio of approximately 17%. A significant change in the forecasted macroeconomic factors could result in a material change in our allowances. An increase of 1% in the principal and interest coverage ratio would increase our allowances by approximately $45 million based on the loans and interest receivable balance outstanding as of March 31, 2020. Our allowance as of March 31, 2020 has not been adjusted to account for the proactive or reactive measures that we have taken that are intended to reduce financial hardships experienced by our customers. Given the uncertainty of the ultimate impact that the COVID-19 outbreak may have on their financial condition, we have not made any adjustments to account for the potential mitigation of losses that might be achieved through these measures. Further, our allowance as of March 31, 2020 has not been adjusted to account for the potential impact of the Coronavirus Aid, Relief, and. Economic Security Act or the “CARES Act”, which is 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.

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Item 3: 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.

Interest Rate Risk

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 condensed consolidated balance sheets as customer accounts.

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, approximately ~~60%~~73% and ~~78%~~63%, 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 we hold on our condensed 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. 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.

~~On September 26, 2019, we issued~~We have $5.0 billion in fixed rate ~~notes~~debt with varying maturity ~~dates for an aggregate principal amount of $5.0 billion.~~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.

~~On September 11,~~ We also have various committed credit facilities available to us aggregating to $6.0 billion. We are obligated to pay interest on loans under these facilities as well as other customary fees, including an upfront fee and an unused commitment fee based on our debt rating. Borrowings under these facilities, 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 March 31, 2020 and December 31, 2019, we ~~entered into a credit agreement (the “Credit Agreement”) that provides for an unsecured $5.0~~had $3.0 billion five-year revolving credit facility. Additionally, on September 11, 2019, we entered into a 364-day credit agreement (“364-Day Credit Agreement”) that provides for an unsecured $1 billion 364-day revolving credit facility. As of September 30, 2019,and no ~~borrowings were~~amounts outstanding under the Credit Agreement and the 364-Day Credit Agreement, and as such, $6.0 billion of borrowing capacity was available for the purposes permitted by the Credit Agreement and the 364-Day Credit Agreement, subject to customary conditions to borrowing. Upon our entry into the Credit Agreement, the credit agreement that we entered into in the third quarter of 2015 that provided for an unsecured $2.0 billion, five-year revolving credit facility was terminated.

In the fourth quarter of 2018, we entered into an amended credit agreement (“Amended Credit Agreement”) which amended and restated in its entirety the previous agreement entered into in 2017. The Amended Credit Agreement provided for an unsecured $5.0 billion, 364-day delayed-draw term loan credit facility, which was available in up to four separate borrowings until April 6, 2019. As of December 31, 2018, $2.0 billion was outstanding under the Amended Credit Agreement. On April 5, 2019, the Company drew down an additional $500 million under the Amended Credit Agreement. On September 26, 2019, the Amended Credit Agreement was terminated and we repaid $2.5 billion of borrowings outstanding under such agreement.

We also maintain committed and uncommitted credit facilities in various regions throughout the world, with borrowing capacity of approximately $230 million in the aggregate. As of September 30, 2019, substantially all of the borrowing capacity under these credit facilities, ~~was available, subject to customary conditions to borrowing.~~

respectively. For additional information, see ~~Note~~“Note 12—“Debt” in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

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 higher 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.

A 100 basis point increase in interest rates would not have had a material impact on our financial assets or liabilities at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~

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2019.

Foreign Currency Exchange Rate Risk

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 ~~condensed~~ 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~~“Note 10—“Derivative Instruments” to the condensed consolidated financial statements included in this ~~report.~~Form 10-Q.

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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”) ~~and~~. 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 ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the amount recorded in AOCI related to our foreign currency exchange forward contracts, before taxes, would have been approximately ~~$619~~$840 million and ~~$707~~$900 million lower, respectively. If the U.S. dollar strengthened by 20% at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the amount recorded in AOCI related to our foreign currency exchange forward contracts, before taxes, would have been approximately ~~$619~~$840 million and ~~$707~~$900 million higher, respectively.

We have an additional foreign currency exchange management program whereby 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 ~~$226~~$94 million and ~~$295~~$147 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, without considering the offsetting effect of hedging. Foreign currency exchange contracts in place as of ~~September 30,~~March 31, 2020 would have positively impacted income before income taxes by approximately $99 million, resulting in a net positive impact of approximately $5 million. Foreign currency exchange contracts in place as of December 31, 2019 would have positively impacted income before income taxes by approximately $217 million, resulting in a net negative impact of approximately $9 million. Foreign currency exchange contracts in place as of December 31, 2018 would have positively impacted income before income taxes by approximately $308$153 million, resulting in a net positive impact of approximately ~~$13~~$6 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.

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Equity Investment Risk

Our strategic investments are subject to a variety of market-related risks that could substantially reduce or increase the carrying value of ~~our holdings.~~the portfolio. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, our strategic investments totaled ~~$1.8~~$1.7 billion and ~~$293 million,~~$1.8 billion, respectively, which represented approximately 14% and 3%13% of our total cash, cash equivalents, and investment portfolio at those ~~dates, respectively.~~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.~~companies that are not publicly traded. We are required to record all adjustments to the carrying value of these strategic investments through our condensed 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.~~securities accounted for under the Measurement Alternative. These changes could be material based on market conditions. A hypothetical adverse change in the carrying value of our strategic investments of 10%, which could be experienced in the near term, would result in a decrease of approximately ~~$179~~$170 million to the carrying value of the portfolio. 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 ~~the~~ securities, ~~in which we have invested,~~ and other publicly available data.

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Item 4: Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) required by Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

(b) Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1: Legal Proceedings

The information set forth under ~~Note~~“Note 13—“Commitments and Contingencies—Litigation and Regulatory Matters” to the condensed consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference.

Item 1A: Risk Factors

We are subject to various risks and uncertainties, which could materially affect our business, results of operations, financial condition, future results, and the trading price of our common stock. You should read carefully the following information together with the information appearing in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 as filed with the SEC on February 7, 6, 2020 (“2019 ~~(“2018~~ Form 10-K”). The following information supplements and, to the extent inconsistent, supersedes some of the information appearing in the Risk Factors section of our ~~2018~~2019 Form 10-K. These risk factors, as well as our condensed consolidated financial statements and notes thereto and the other information appearing in this report, should be reviewed carefully for important information regarding risks that affect us.

~~Global~~The recent novel coronavirus (COVID-19) outbreak could materially and ~~regional economic conditions could harm~~adversely affect our ~~business.~~business, our financial condition, and results of operations.

~~Our~~The novel strain of the coronavirus identified in late 2019 has spread globally, and the outbreak was characterized as a pandemic by the World Health Organization in March 2020. The outbreak has resulted in government authorities and businesses throughout the world implementing numerous measures intended to contain and limit the spread of COVID-19, including travel bans and restrictions, quarantines, shelter-in-place and lock-down orders, and business limitations and shutdowns. These measures have negatively impacted consumer and business spending and payments activity generally, and have significantly contributed to deteriorating macroeconomic conditions and higher unemployment in some countries, including those in which we have significant operations. While governments around the world have taken steps to attempt to mitigate some of the more severe anticipated economic effects of COVID-19, there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The COVID-19 outbreak has adversely impacted and is likely to further adversely impact our results of operations, as well as the operations of our customers, suppliers, vendors and other business partners. As the COVID-19 outbreak has spread, cross-border activity and domestic commerce have sharply declined, due in large part to the measures described above intended to contain and limit the outbreak’s spread. These measures may remain in place for a significant period of time and are likely to continue to adversely affect our business, results of operations and ~~performance depend significantly on global~~financial condition. In particular, we have experienced and ~~regional economic conditions. Uncertainty about global~~may continue to experience adverse financial impacts from a number of operational factors, including, but not limited to, the following:

Merchants selling goods or services in advance of the date of their delivery (e.g., travel and ~~regional economic~~ events ~~and conditions may~~verticals) or experiencing bankruptcy, business failure, or other business interruption, which could result in ~~consumers~~our being liable to the buyers of such goods or services, either through our buyer protection program or through chargebacks on payment cards used by customers to fund their payments;

Merchants who utilize our PayPal Working Capital and ~~businesses postponing or lowering spending in response to, among other factors:~~PayPal Business Loan products defaulting on their payment obligations;


•	Consumers who utilize our PayPal Credit products defaulting on their payment obligations, including U.S. consumers, which may adversely impact our revenue share on the portfolio of U.S. consumer receivables owned by Synchrony Bank;

~~tighter credit,~~

~~higher unemployment,~~

~~consumer debt levels or reduced consumer confidence,~~

~~financial market volatility,~~

~~fluctuations in foreign currency exchange rates~~Increased cyber and ~~interest rates,~~

~~changes and uncertainties~~payment fraud risk related to ~~government fiscal and tax policies,~~

~~changes and uncertainties about trade relationships between~~COVID-19, as cybercriminals attempt to profit from the ~~U.S. and various other countries with respect to international trade agreements and policies, treaties, government regulations and tariffs, including the possibility~~disruption in light of ~~the U.S. and/or other countries imposing greater restrictions on international trade, significant increases in tariffs on imported goods,~~increased online banking, ecommerce, and other ~~restrictive actions,~~online activity;

Challenges to the ~~inability of the U.S. Congress to enact a budget in a fiscal year, another sequestration, and/or another shutdown of the U.S. government,~~

~~government austerity programs,~~availability and

~~other negative financial news or macroeconomic developments.~~

These and other global and regional economic events and conditions, including Brexit, 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. In addition, any financial turmoil affecting the banking system or financial markets could cause additional consolidation of the financial services industry, significant financial service institution failures, new or incremental tightening in the credit markets, low liquidity, and extreme volatility or distress in the fixed income, credit, currency, and equity markets, which could have a material adverse impact on our business. See also the risk factor captioned, ~~“The United Kingdom's departure from the EU could adversely affect us.”~~

~~If we cannot keep pace with rapid technological developments to provide new and innovative products and services, the use~~ 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 data centers or customer service and ~~consequently,~~operations centers or the temporary closure of sites due to mandatory local lockdown requirements, which may impact our ~~revenues could decline.~~

~~Rapid, significant,~~employees and/or the systems or employees of our customers and ~~disruptive technological changes impact the industries in which we operate, including developments in:~~

~~technologies supporting our regulatory and compliance obligations (for example in relation to KYC and CIP obligations),~~

~~artificial intelligence and machine learning (for example in relation to fraud and risk decisioning),~~

payment technologies (for example real time payments, payment card tokenization and virtual currencies, including distributed ledger and blockchain technologies, and proximity payment technology, such as NFC and other contactless payments),business partners; and

~~commerce technologies, including in-store, online, mobile, virtual~~An increased volume of unanticipated customer requests for support (resulting in increased call center volume to our customer support and ~~social commerce (i.e., ecommerce through social networks).~~operations centers) and regulatory requests for information and support or additional regulatory requirements, which could require additional resources and costs to address.

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AsThese factors may remain prevalent for a ~~result,~~significant period of time and may continue to adversely affect our business, results of operations and financial condition, even after the COVID-19 outbreak has subsided. In addition, actions that we ~~expect new services~~have taken or may take in the future intended to assist customers impacted by COVID-19 (e.g., waiving certain fees and ~~technologies~~deferring repayments on business loans for certain affected small business customers) may negatively impact our results of operations.

The COVID-19 outbreak has required and is likely to continue to ~~emerge~~require significant management attention and ~~evolve,~~substantial investments of time and resources across our enterprise. The spread of COVID-19 has caused us to make significant modifications to our business practices, including restrictions on employee travel, closings or significant limitations on employee work locations, and cancellation of physical participation in meetings, events, and conferences. An increased number of our employees are working remotely as a result of the outbreak, 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, give rise to claims by employees, and impair our ability to manage our business or otherwise adversely affect our business. Additionally, COVID-19 could negatively affect our internal controls over financial reporting as a portion of our workforce is required to work from home and therefore new or modified processes, procedures, and controls could be required to respond to changes in our business environment. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19 or will otherwise be satisfactory to government authorities.

The 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 subject to change, including, but not limited to, the duration, scope and severity of the outbreak, the actions to contain COVID-19 or treat its impact, and how quickly and to what extent normal economic and operating conditions could potentially resume. The spread of COVID-19 has led to disruption and volatility in the global capital markets, which may increase our cost of capital and may adversely affect our ability to access the capital markets. Even after the COVID-19 outbreak has subsided, we may continue to experience adverse impacts to our business as a result of the global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. In addition, we cannot predict the ~~effects of technological changes~~impact that COVID-19 will have on our ~~business. In addition to our own initiatives~~customers, suppliers, vendors, and ~~innovations, we rely in part~~other business partners, and their respective financial condition, and any significant negative impact on ~~third~~these parties ~~including some of our competitors, for the development of~~could materially and ~~access to new or evolving technologies. These third parties may restrict or prevent our access to, or utilization of, those technologies,~~adversely impact us.

There are no comparable recent events that provide guidance as well as their platforms or products. In addition, we may not be able to accurately predict which technological 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~~effect the spread of COVID-19 as a global pandemic may have, and as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. While we ~~operate will continue to emerge and may be superior to, or render obsolete,~~do not yet know the technologies we currently use in our products and services. Developing and incorporating new technologies into our products and services may require substantial expenditures, take considerable time, and ultimately may not be successful. In addition, our ability to adopt new products and services and to develop new technologies may be inhibited by industry-wide standards, payments networks, changes to laws and regulations, thefull extent of resistance to change from consumers or merchants, third-party intellectual property rights, or other factors. Our success will depend on our ability to develop and incorporate new technologies and adapt to technological changes and evolving industry standards; if we are unable to do so in a timely or cost-effective manner, our business could be harmed.

~~The United Kingdom’s departure from~~ the ~~EU could adversely affect us.~~

The United Kingdom (“U.K.”) held a referendum in June 2016 in which a majority of voters approved an exit from the European Union (“EU”) (commonly referred to as “Brexit”). In March 2017, the U.K. government initiated the exit process under Article 50 of the Treaty on European Union. This commenced a two-year period, expiring on March 29, 2019, after which time the U.K was expected to leave the EU. The EU subsequently extended this date to October 31, 2019. There is a significant lack of clarity over the eventual date and terms of the U.K.'s exit from the EU and the terms of the U.K.'s future relationship with the EU. The U.K.'s financial service regulators have implemented Temporary Permission Regimes that will be in place should the U.K. exit the EU without an agreement. The regulators will use this and other powers to support European Economic Area (“EEA”) financial services firms, including our EU operations, in continuing to conduct business in the U.K. in an orderly manner should the U.K. exit the EU without an agreement.

Brexit could adversely affect U.K., regional (including European), and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the British Pound and Euro, which in turn could adversely affect us or our customers and companies with which we do business, particularly in the U.K. Brexit could lead to greater restrictions on the supply and availability of goods and services between the U.K. and the EEA region, with the potential inability of U.K. companies to fulfill orders leading in turn to a risk of increased merchant defaults and buyer protection claims. Brexit could also trigger a general deterioration in credit conditions, a downturn in consumer sentiment and overall negative economic growth. Any of these scenarios could have an adverse effectimpacts on our business, financial condition, and results of operations, or ~~our customers.~~

~~In addition, Brexit could lead to legal uncertainty and increased complexity for financial services firms~~the global economy as national laws and regulations in the U.K. start to diverge from EU laws and regulations. In particular, depending on the terms of Brexit, we may face new regulatory costs and challenges, including the following:

~~if we are unable to utilize appropriate authorizations and regulatory permissions, our European operations could lose their ability to offer services into the U.K. market on~~ a cross-border basis and for our U.K. based operations to offer services on a cross-border basis in the European markets. For example, our ability to work primarily with the Luxembourg regulator as the lead authority for various aspects of the U.K. operations of PayPal (Europe) S.à.r.l. et Cie., SCA (“PayPal (Europe))” and with the Swedish regulator for various aspects of the U.K. operations of iZettle AB (pub)(“iZettle”) may be impacted;

we could be required to obtain additional regulatory permissions to operate in the U.K. market, adding costs and potential inconsistency to our business (and, depending on the capacity of the U.K. authorities, the criteria for obtaining permission, and any possible transitional arrangements, there is a risk that our business in the U.K. could be materially affected or disrupted);

we could be required to comply with regulatory requirements in the U.K. that are in addition to, or inconsistent with, the regulatory requirements of the EU, leading to increased complexity and costs for our European and U.K. operations; and

~~our ability to attract and retain the necessary human resources in appropriate locations to support our U.K. and the European business could be adversely impacted.~~

~~These and other factors related to Brexit could,~~whole, these impacts, individually or ~~in the aggregate,~~collectively, could have a material adverse impact on our business, financial condition and results of ~~operations~~.

~~Table~~operations. In addition, the impact of ~~Contents~~

COVID-19 may heighten or exacerbate many of the other risks discussed in “Item 1A—Risk Factors” in 2019 Form 10-K, any of which could have a material impact on us.

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 laws, rules, regulations, policies, and legal interpretations in the markets in which we operate, including, but not limited to, those governing:~~

~~banking,~~

~~credit,~~

~~deposit taking,~~

~~cross-border and domestic money transmission,~~

~~prepaid access,~~

~~foreign exchange,~~

~~privacy,~~

~~data protection,~~

~~cybersecurity,~~

~~banking secrecy,~~

~~payment services (including payment processing and settlement services),~~

~~consumer protection,~~

~~antitrust and competition,~~

~~economic and trade sanctions,~~

~~anti-money laundering, and~~

~~counter-terrorist financing.~~

~~Our success and increased visibility may result in increased regulatory oversight and enforcement and more restrictive rules and regulations that apply to our business.~~

As we expand and localize our international activities, we have become increasingly obligated to comply with the laws of the countries or markets in which we operate. 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. often 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 governmental authority (including changes to or expansion of the interpretation of those laws, regulations, or orders), including those discussed in this risk factor, 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, restrict our operations, and force us to change our business practices, make product or operational changes, 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 regulatory and enforcement regimes, coupled with the global scope of our operations and the evolving global regulatory environment, could result in a single event giving rise to 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, or agents will not violate such laws and regulations.

Payments Regulation

In the U.S., PayPal, Inc. has obtained 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 services 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 of customer funds, reporting requirements, bonding requirements, and inspection by state regulatory agencies. Accordingly, if we violate these laws or regulations, 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.

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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.

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We principally provide our services to customers in the EU through 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, ~~fund management,~~ corporate governance, privacy, data protection, data governance, information security, banking secrecy, taxation, cross-border payment, risk management, sanctions, or other requirements imposed on Luxembourg ~~banks.~~credit institutions. In addition, EU laws and regulations are ~~typically~~ subject to ~~different and~~ potentially inconsistent interpretations by the countries that are members of the EU, which can make compliance more costly and operationally difficult to manage. Moreover, the countries that are EU members may each have different and potentially inconsistent domestic regulations implementing European Directives, which could make compliance more costly and operationally difficult to manage. The Revised Payment Services Directive (“PSD2”) took effect in Europe in 2018, with certain requirements ~~only being~~becoming applicable from 2019 or later. ~~The implementation of~~ PSD2 ~~may negatively affect our business. PSD2 seeks to enable~~enables new payment and information sharing models whereby ~~a newly formed category of~~ regulated payment ~~provider would be~~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 seeks to regulate more online platforms that handle payments for their sellers. PayPal merchants with affected business models which are not licensed, or which do not benefit from exemptions or integrate a compliant marketplaces solution may not be able to offer PayPal products in the future. 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~~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 ~~its~~has plans to finalize full compliance with SCA; amending or accelerating these plans may adversely impact PayPal’s European business. These authentication requirements were originally scheduled to commence from September 2019 but European national supervisory authorities have decided to delay enforcing them during a transitional period (the duration of which is still being determined) due to a lack of industry readiness.

customer value proposition.

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 some activity of PayPal (Europe) could become directly regulated by the ECB rather than the CSSF, the Luxembourg regulator, ~~(the “CSSF”),~~ as its national supervisor, which 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”) passed~~came into ~~law~~effect in Singapore in January ~~2019 and is expected to come into effect in~~ 2020. ~~Under the PS Act,~~ PayPal Pte. Ltd. is currently operating within a statutory transitional period, and will be required to apply for a license with MAS before January 27, 2021 in order to continue to provide payments services in Singapore. ~~Furthermore, once the PS Act comes into force and is fully implemented,~~Once PayPal Pte. Ltd. obtains its license, we ~~may face new regulatory costs and challenges, including the following:~~

~~we could~~will be required to comply with new regulatory requirements ~~resulting~~that will result in increased operational complexity and costs for our Singapore and international ~~operations;~~

we could be required to make changes to our compliance program, resulting in increased complexity and costs to operate both in Singapore as well as in the cross-border markets which are served by PayPal Pte. Ltd; and

~~we could be required to comply with additional safeguarding requirements, which could increase our operational costs.~~

operations.

In certain markets outside the U.S. (e.g., Australia), 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, we may be subject to significant fines or other enforcement action if we violate applicable reporting, anti-money laundering, capital requirements, privacy, corporate governance, risk management, or any other applicable requirements.

PayPal Australia Pty Limited (“PPAU”) self-reported a potential violation to the Australian Transaction Reports and Analysis Centre ~~(AUSTRAC)~~(“AUSTRAC”) on May 22, 2019 with respect to the reporting of international funds transfer instructions under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (“AML/CTF Act”). ~~On September 23,~~Please see "Note 13—Commitments and Contingencies—Litigation and Regulatory Matters” for additional disclosure regarding this matter.

From time to time, we may acquire entities subject to local regulatory supervision or oversight. For example, in December 2019, ~~PPAU received~~we completed our acquisition of a ~~notice from AUSTRAC requiring that PPAU appoint an external auditor~~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 China and is subject to ~~review certain aspects~~regulatory supervision by the People’s Bank of ~~PPAU’s compliance with its obligations under the AML/CFT Act. PPAU is continuing to cooperate with AUSTRAC in this matter.~~

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China and other regulatory bodies. We have been, and expect to continue to be, required to apply for various licenses, certifications, and regulatory approvals in a number 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. There can be no assurance that we will be able to (or decide to) obtain any such licenses, certifications, and approvals. In addition, there are substantial costs and potential product changes involved in maintaining and renewing such licenses, certifications, and approvals, and 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 requirements 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.

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In many countries, it may not be clear whether we are required to be licensed as a payment services provider, bank, financial institution, or otherwise. In such markets, we may rely on local banks to process payments and conduct foreign currency exchange transactions in local currency. Local regulators may use their ~~power~~authority to slow or halt payments to local merchants conducted through local banks or otherwise prohibit or impede us from doing business in a jurisdiction. Such regulatory actions or the need to obtain licenses, certifications, or other regulatory approvals could impose substantial costs, involve considerable delay to the provision or development of our services, require significant and costly operational changes, impose restrictions, limitations, or additional requirements on our business, or prevent us from providing any products or services in a given market.

~~Consumer Protection~~

We are subject to consumer protection, antitrust and competition-related laws and regulations in the countries in which we operate. In the U.S., we are subject to federal and state consumer protection laws and regulations applicable to our activities, including the Electronic Fund Transfer Act (“EFTA”) and Regulation E as implemented by the Consumer Financial Protection Bureau (“CFPB”). These regulations require us to provide advance disclosure of changes to our services, follow specified error resolution procedures, and reimburse consumers for losses from certain transactions not authorized by the consumer. Additionally, technical violations of consumer protection laws could result in the assessment of actual damages or statutory damages or penalties of up to $1,000 in individual cases or up to $500,000 per violation in any class action and treble damages in some instances; we could also be liable for plaintiffs’ attorneys’ fees in such cases. We are subject to, and have paid amounts in settlement of, lawsuits containing allegations that our business violated the EFTA and Regulation E or otherwise advance claims for relief relating to our business practices (e.g., that we improperly held consumer funds or otherwise improperly limited consumer accounts).

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 person-to-person 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 customer dissatisfaction, discourage customers from opening new accounts, require us to reallocate resources, and increase our costs, which could negatively affect our business.

In May 2015, we entered into a Stipulated Final Judgment and Consent Order (“Consent Order”) with the CFPB in which we settled regulatory claims arising from PayPal Credit practices between 2011 and 2015. The Consent Order included obligations on PayPal to pay $15 million in redress to consumers and a $10 million civil monetary penalty, and required PayPal to make various changes to PayPal Credit disclosures and related business practices. We continue to cooperate and engage with the CFPB and work to ensure compliance with the Consent Order, which may result in us incurring additional costs.

PayPal (Europe) principally offers its services in EU countries through a “passport” notification process through the Luxembourg regulator to regulators in other EU member states pursuant to EU regulations. Regulators in these countries could notify PayPal (Europe) of local consumer protection laws that apply to its business, in addition to Luxembourg consumer protection law, and could also seek to persuade the Luxembourg regulator to order PayPal (Europe) to conduct its or the PayPal group's activities in the local country directly or through a branch office. These or similar actions by these regulators could increase the cost of, or delay, our plans to expand our business in EU countries.

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~~Economic and Trade Sanctions~~

We are required to comply with economic and trade sanctions administered by the United States, the European Union, relevant EU member states, and other jurisdictions in which we operate. We have self-reported to OFAC certain transactions that were inadvertently processed but subsequently identified as possible violations of U.S. economic and trade sanctions. In March 2015, we reached a settlement with OFAC regarding possible violations arising from our sanctions compliance practices between 2009 and 2013, prior to the implementation of our real-time transaction scanning program. Subsequently, we have self-reported additional transactions as possible violations, and we have received new subpoenas from OFAC seeking additional information about certain of these transactions. Such self-reported transactions could result in claims or actions against us, including litigation, injunctions, damage awards, fines or penalties, or require us to change our business practices in a manner that could result in a material loss, require significant management time, result in the diversion of significant operational resources, or otherwise harm our business.

~~Anti-Money Laundering and Counter-Terrorist Financing~~

We are subject to various anti-money laundering and counter-terrorist financing laws and regulations around the world that prohibit, among other things, our involvement in transferring the proceeds of criminal activities. Regulators in the U.S. and other regulators globally continue to increase their scrutiny of compliance with these obligations, which may require us to further revise or expand our compliance program, including the procedures we use to verify the identity of our customers and to monitor international and domestic transactions. Many countries in which we operate also have anti-money laundering and counter-terrorist financing laws and regulations, and we have been and will continue to be required to make changes to our compliance program in various jurisdictions in response. Regulators regularly re-examine the transaction volume thresholds at which we must obtain and keep applicable records or verify identities of customers and any change in such thresholds could result in greater costs for compliance. In the EU, the implementation of the so-called Fourth and Fifth Anti-Money Laundering Directives and the regulation on information accompanying transfer of funds (commonly known as the Revised Wire Transfer Regulation) may make compliance more costly and operationally difficult to manage, lead to increased friction for customers, and result in a decrease in business. Penalties for non-compliance with the revised Anti-Money Laundering Directive could include fines of up to 10% of PayPal (Europe)’s total annual turnover.

~~Privacy and Protection of User Data~~

We are subject to a number of laws, rules, directives, and regulations (which we refer to as “privacy laws”) relating to the collection, use, retention, security, processing, and transfer (which we collectively refer to as “processing”) of personally identifiable information about our customers and employees (which we refer to as “personal data”) in the countries where we operate. Our business relies on the processing of data in many jurisdictions and the movement of data across national borders. As a result, much of the personal data that we process, especially financial information, is regulated by multiple privacy laws and, in some cases, the privacy laws of multiple 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.

Regulatory scrutiny of privacy, data protection, and the collection, storage, use, and sharing of personal data is increasing around the world. There is uncertainty associated with the legal and regulatory environment relating to privacy and data protection laws, which continue to develop in ways we cannot predict, including with respect to evolving technologies such as cloud computing, artificial intelligence, and blockchain technology. Any failure or perceived failure to comply with existing or new laws, regulations, or orders of any governmental authority (including changes to or expansion of the interpretation of those laws, regulations, or orders), including those discussed in this risk factor, may subject us to significant fines, penalties, civil lawsuits, and enforcement actions in one or more jurisdictions, result in additional compliance requirements, increase regulatory scrutiny of our business, restrict our operations, and force us to change our business practices, make product or operational changes, or delay planned product launches or improvements.

Any failure, or perceived failure, by us to comply with our privacy policies as communicated to users prior to our collection, use, storage and transfer, and disclosure of their personal data, with applicable industry data protection or security standards, with any applicable regulatory requirements or orders, or with privacy, data protection, information security, or consumer protection-related laws and regulations in one or more jurisdictions could result in proceedings or actions against us by data protection authorities (which we refer to as “supervisory authorities”), governmental entities or others, including class action privacy litigation in certain jurisdictions, would subject us to significant awards, fines, penalties, judgments, and negative publicity arising from any financial or non-financial damages suffered by any individuals. This could, individually or in the aggregate, materially harm our business. Specifically, this would likely require us to change our business practices, and would increase the costs and complexity of compliance. In addition, compliance with inconsistent privacy laws may restrict our ability to provide products and services to our customers.

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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”) 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, 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 who 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 Safe Harbor known as “Privacy Shield.” Both the Privacy Shield framework and SCCs are facing legal challenges in the European justice system. To the extent that the Privacy Shield or SCCs are invalidated, PayPal’s ability to process EEA personal data with third parties outside of the EEA and intra-group with its U.S. affiliates could be jeopardized. Additionally, there continues to be the lack of clarity from European Commission and Data Protection Authorities around the adequacy of data protections afforded EEA data subjects by applicable UK privacy laws, which includes the use of SCCs and other methods of transferring personal data of EEA data subjects to the UK.

~~PayPal is not a bank or licensed lender in the U.S. and relies upon third parties to make loans and provide other products critical to our business, which raises additional risks.~~

As PayPal is neither a chartered financial institution, nor licensed to make loans in any state in the U.S., we rely on third-party chartered financial institutions to provide PayPal branded credit products to our customers in the U.S., including consumer credit products such as PayPal Credit, PayPal branded and Venmo-branded Mastercard credit cards, and business credit products such as PayPal Working Capital and PayPal Business Loan products. Any termination or interruption in a partner bank’s ability or willingness to lend could interrupt, potentially materially, our ability to offer consumer and business loan products, which could materially and adversely affect our business. In the event of a partner bank’s inability or unwillingness to lend, we may need to reach a similar agreement with another chartered financial institution or obtain our own bank charter or lending licenses. We may be unable to reach a similar agreement with another partner on favorable terms or at all. Obtaining a bank charter or lending licenses would be a costly, time-consuming and uncertain process, and would subject us to additional laws and regulatory requirements, which could be burdensome, increase our costs, and require us to change our business practices. In addition, as a service provider to these bank partners, which are federally supervised U.S. financial institutions, we are subject from time to time to examination by their federal banking regulators.

In July 2018, we completed the sale of our U.S. consumer credit receivables portfolio to Synchrony Bank, for total consideration of $6.9 billion. As a part of a separate agreement, PayPal earns a revenue share on the portfolio of consumer receivables owned by Synchrony Bank, which includes both the sold and newly generated receivables, and we do not hold an ownership interest in newly generated consumer credit receivables. It may take us longer than expected to realize the anticipated benefits of the transaction, and those benefits may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results. In addition, our increased reliance on Synchrony Bank, including in connection with this agreement, subjects us to risks in the nature of those discussed in this “Risk Factors” section under the caption “~~We rely on third parties in many aspects of our business, which creates additional risk~~.”

~~Acquisitions, joint ventures, strategic investments, and other strategic transactions could result in operating difficulties and could harm our business.~~

Acquisitions, joint ventures, strategic investments, and other strategic transactions are important elements of our overall corporate strategy. We expect to continue to evaluate and consider a wide array of potential strategic transactions as part of our overall business strategy, including business combinations, acquisitions, and dispositions of certain businesses, technologies, services, products, and other assets, as well as joint ventures, strategic investments, and commercial and strategic partnerships. These transactions may involve significant challenges, uncertainties, and risks, including:

~~the potential loss of key customers, vendors, and other key business partners of the companies we acquire, or dispose of, following and continuing after announcement of our transaction plans;~~

difficulty making strategic hires of new employees, declining employee morale, and retention issues affecting employees (particularly the potential loss of key personnel) of companies that we acquire or dispose of, which may result from changes in compensation, management, reporting relationships, future prospects, or the direction of the acquired or disposed business;

~~diversion of management time and focus;~~

~~inability to realize synergies expected to result from an acquisition;~~

the need to and difficulty of integrating the operations, systems (including accounting, compliance, management, information, human resource, and other administrative systems), technologies, data assets, products, and personnel of each acquired company, which is an inherently risky and potentially lengthy and costly process;

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the need to and difficulty of implementing and/or enhancing controls, procedures, and policies appropriate for a larger public company at acquired companies which, prior to the acquisition, may have lacked such controls, procedures, and policies or whose controls, procedures, and policies did not meet applicable legal and regulatory standards;

~~the inefficiencies and lack of control that may result if integration of acquired companies is delayed or not implemented, and unforeseen difficulties and costs that may arise as a result;~~

potential exposure to new or increased regulatory oversight and uncertain or evolving legal, regulatory and compliance requirements associated with new products and services or entry into new markets, including transactions with, or investments in, companies involved in new or developing businesses or industries;

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;

~~risks associated with our expansion into new international markets;~~

~~unidentified issues not discovered in our due diligence process, including product or service quality issues, intellectual property issues, and legal contingencies;~~

~~risks associated with the complexity of entering into and effectively managing joint ventures, strategic investments, and other strategic partnerships;~~

~~risks associated with undetected cyberattacks or security breaches at companies that we acquire or with which we may combine or partner;~~

~~lawsuits or regulatory actions resulting from the transaction;~~

liability for activities or conduct of an acquired company before the acquisition, including legal and regulatory claims or disputes, violations of laws and regulations, commercial disputes, tax liabilities, and other known and unknown liabilities;

the need to maintain, and comply with the requirements of, licenses for certain companies that we have acquired, and risks associated with any failure to maintain such licenses or comply with associated requirements;

the acquisition of new customer and employee personal information, which in and of itself may require regulatory approval and/or additional controls, policies, and procedures, and subject us to additional exposure and additional complexity and costs of compliance; and

our dependence on the accounting, financial reporting, operating metrics and similar systems, controls and processes of acquired businesses, and the risk that errors or irregularities in those systems, controls, and processes will lead to errors in our financial statements or make it more difficult to manage the acquired business.

At any given time, we may be engaged in discussions or negotiations with respect to one or more of these or other types of 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. It may take us longer than expected to fully realize the anticipated benefits of these transactions, and those benefits may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results. Because acquisitions 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 our results of operations and the interests of holders of our indebtedness, as applicable.

We completed our acquisition of iZettle on September 20, 2018. Prior to the closing of the acquisition, the U.K. Competition and Markets Authority (“CMA”) initiated a review of the transaction. On December 5, 2018, the CMA referred the acquisition for a Phase 2 investigation and on December 24, 2018, directed PayPal to appoint a monitoring trustee. We held PayPal's and iZettle's U.K. businesses separate pursuant to an Initial Enforcement Order ("IEO") imposed by the CMA, pending completion of the CMA’s investigation. On June 12, 2019, the CMA announced that it unconditionally cleared PayPal's acquisition of iZettle. On September 24, 2019, the CMA announced its determination that PayPal failed to comply with certain aspects of CMA’s IEO, and imposed a £250,000 penalty. The decision does not require PayPal to delay or otherwise modify its ongoing integration efforts with iZettle.

In September 2019, PayPal announced that the People’s Bank of China has approved the acquisition of a 70% equity interest in Guofubao Information Technology Co. (GoPay), Ltd., a holder of a payment business license in China, by PayPal Information Technologies Co., a wholly-owned subsidiary of the Company. The transaction is expected to close in the fourth quarter of 2019 and is subject to customary closing conditions. For a discussion of risks associated with our planned domestic (in-country) expansion into China in connection with this acquisition, please see the risk factor captions “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~~” and “Our international operations subject us to increased risks, which could harm our business,” above.~~

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Joint ventures and strategic investments where we have a minority ownership stake inherently involve a lesser degree of influence over business operations, thereby potentially increasing the financial, legal, operational, and/or compliance risks associated with the joint venture or strategic investment. In addition, we may be dependent on joint venture partners, controlling shareholders, management, or other persons or entities who control them and who may have business interests, strategies or goals that are inconsistent with ours. Business decisions or other actions or omissions of the joint venture partners, controlling shareholders, management, or other persons or entities who control joint ventures or companies in which we invest may adversely affect the value of our investment, result in litigation or regulatory action against us, and otherwise damage our reputation and brand.

~~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:~~

our ability to pay interest and repay the principal for our indebtedness is dependent upon our ability to manage our business operations and generate sufficient cash flows to service such debt. We may be required to use a significant portion of our cash flow from operations and other available cash to service our indebtedness, thereby reducing the amount of cash available for other purposes, including capital expenditures and acquisitions;

~~our indebtedness and leverage may increase our vulnerability to downturns in our business, to competitive pressures, and to adverse changes in general economic and industry conditions;~~

~~our ability to obtain additional financing for working capital, capital expenditures, acquisitions, share repurchases, or other general corporate and other purposes may be limited; and~~

~~our flexibility in planning for, or reacting to, changes in our business and our industry may be limited.~~

Our revolving credit facility and the indenture 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.

In addition, 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 rate payable by us under out indebtedness may increase. In addition, any downgrades to our credit ratings may affect our ability to obtain additional financing in the future and may affect the terms of any such financing. Any of these factors could adversely affect our financial condition and results of operations.

~~Our point of sale solutions expose us to additional risks.~~

We have announced several point of sale solutions, which enable merchants to accept payments using a payments card reader attached to, or otherwise communicating with, a mobile device or to scan payment cards and codes using the mobile device’s embedded camera, and which enable consumers to use their mobile devices to pay at the point of sale. We have entered into strategic partnerships with major payment card networks to further expand our relationship in a way that will make it easier for merchants to accept and consumers to choose to pay for transactions utilizing credit and debit cards via PayPal at the point of sale. Those agreements provide us with access to each of these partner's tokenization services in the U.S. for in-store point-of-sale PayPal transactions, which we expect will increase the number of point of sale transactions that we process. We believe that our recent acquisition of iZettle will enable us to further expand our in-store presence. As we continue to expand our product and service offerings at the point of sale, we will face additional risks, including:

~~increased expectations from merchants regarding the reliability and availability of our systems and services and correspondingly lower amounts of downtime, which we may not be able to meet;~~

increased expectations from merchants that our systems and services will help them to comply with laws and regulations relating to tax, accounting, and bookkeeping, such as cash register systems, which we may not be able to meet;

~~significant competition at the point of sale, particularly from established payment card providers, many of which have substantially greater resources than we do;~~

increased targeting by fraudsters; given that our fraud models are less developed in this area, we may experience increases in fraud and associated transaction losses as we adjust to fraudulent activity at the point of sale;

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exposure to product liability claims to the extent that hardware devices (e.g., card readers) that we produce for use at the point of sale malfunction or are not in compliance with laws, which could result in substantial liability and require product recalls or other actions;

~~constraints in key resources to develop and maintain point of sale software and ancillary hardware;~~

~~exposure to additional laws, rules, and regulations;~~

increased reliance on third parties involved with processing in-store payments, including independent software providers, electronic point of sale providers, hardware providers (such as card reader, cash drawer and pin-pad providers), payment processors, and banks that enable in-store transactions; and

~~lower operating income than our other payment solutions.~~

~~Unless we are able to successfully manage these risks, including driving adoption of, and significant volume through, our point of sale solutions over time, our business may be harmed.~~

~~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 as various other agreements, including an operating agreement, a tax matters agreement, an employee matters agreement, an 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 agreement 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, and the product development agreement establish certain commercial relationships between eBay and us related to payment processing, credit, and data sharing. If either we or eBay are unable to satisfy our performance, payment, or indemnification obligations under these agreements, we could incur operational difficulties or losses or be required to make substantial indemnification or other payments to eBay.

Disputes between eBay and us have arisen and others may arise in the future. An adverse outcome in any such matters could materially and adversely affect our business, results of operations, and financial condition. eBay and PayPal are currently involved in a dispute regarding the calculation and amount of referral services fees due to eBay under the operating agreement. The parties are currently in arbitration proceedings with respect to this dispute pursuant to the dispute resolution provisions in the separation and distribution agreement.

Our relationship with eBay is governed, in part, by an operating agreement entered into at separation with a term of five years (expiring July 2020). This operating agreement defines a number of important elements of our commercial relationship with eBay, as well as certain obligations and restrictions that limit PayPal’s provision of services to certain competitive platform operators of eBay (as specified in the operating agreement). eBay remains a significant source of our revenues and operating income. We expect the portion of our revenue and operating income attributable to eBay to continue to decline due to various factors (many of which are beyond our control), including the expiration (or earlier termination) of the operating agreement with eBay, and the extent to which eBay intermediates payments on its platform (including by acting as a merchant of record), limits the availability of PayPal as a payment option or offers (or promotes) alternative payment options, directs transactions on its platforms to different providers of payment services, or eliminates or modifies its risk management or customer protection programs on its platforms, which could result in customer dissatisfaction, reduction in eBay volume, and other consequences adverse to our business. If we are unable to generate sufficient business from our non-eBay customers to offset the expected reduction in the portion of our business attributable to eBay, it could materially impact the growth in our business and our ability to meet our long-term financial targets.

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Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Issuances of Unregistered Securities

On January 3, 2020, in connection with the closing of the acquisition of Honey Science Corporation (“Honey”), the Company issued 2,433,499 shares of deferred and restricted shares to certain former holders of Honey equity securities (the “Honey Securityholders”) in exchange for certain Honey shares, with an aggregate value of approximately $265 million. The deferred and restricted shares are subject to repurchase or forfeiture in certain circumstances and vest over three years. The deferred and restricted shares were issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon one or more of the following exemptions: Section 4(a)(2) of the Securities Act, Regulation D promulgated under the Securities Act, and/or Regulation S promulgated under the Securities Act.

Repurchases of Equity Securities

In April 2017, our Board of Directors authorized a stock repurchase program that ~~provides~~provided for the repurchase of up to $5 billion of our common stock, with no expiration from the date of authorization. In July 2018, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to $10 billion of our common stock, with no expiration from the date of authorization. This program ~~will become~~became effective during the first quarter of 2020 upon completion of the April 2017 stock repurchase program. Our stock repurchase programs are intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, may also be used to make opportunistic repurchases of our common stock to reduce outstanding share count. Any share repurchases under our stock repurchase programs may be made through open market transactions, block trades, privately negotiated transactions including accelerated share repurchase agreements or other means at times and in such amounts as management deems appropriate, and will be funded from our working capital or other financing alternatives. Moreover, any stock repurchases are subject to market conditions and other uncertainties and we cannot predict if or when any stock repurchases will be made. We may terminate our stock repurchase programs at any time without prior notice.

The stock repurchase activity under our stock repurchase programs during the three months ended ~~September 30, 2019~~March 31, 2020 is summarized below:

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 June 30, 2019 $ 10,724
July 1, 2019 through July 31, 2019 0.3
$ 111.65
0.3
10,694
August 1, 2019 through August 31, 2019 2.9
$ 107.04
2.9
10,379
September 1, 2019 through September 30, 2019 0.1
$ 107.54
0.1
10,374
Balance as of September 30, 2019 3.3
3.3
$ 10,374



	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 December 31, 2019					$	10,068
January 1, 2020 through January 31, 2020	—	$	—	—	10,068
February 1, 2020 through February 29, 2020	2.6	$	113.31	2.6	9,766
March 1, 2020 through March 31, 2020	4.9	$	102.22	4.9	9,268
Balance as of March 31, 2020	7.5			7.5	$	9,268

⁽¹⁾Average price paid per share for open market purchases includes broker commissions.

~~No activity has occurred to date under the July 2018 stock repurchase program.~~

Item 3: Defaults Upon Senior Securities

None.

Item 4: Mine Safety Disclosures

Not applicable.

Item 5: Other Information

None.

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Item 6: Exhibits

INDEX TO EXHIBITS



		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Date Filed	Filed Herewith
~~4.01~~10.01	~~Indenture, dated~~Honey Science Corporation 2015 Equity Incentive Plan, as ~~of September 26, 2019, by~~amended on February 17, 2017 and ~~between Registrant and Wells Fargo Bank, National Association, as Trustee.~~April 16, 2018	~~8-K~~S-8	~~9/26/2019~~1/7/2020
~~4.02~~10.02	~~Officer’s Certificate,~~First Amendment, dated ~~September 26, 2019, including~~as of March 23, 2020, to the ~~Forms of Note for the Registrant’s 2.200% Notes due 2022, 2.400% Notes due 2024, 2.650% Notes due 2026 and 2.850% Notes due 2029.~~	~~8-K~~	~~9/26/2019~~
~~10.01~~	Credit Agreement, dated as of September 11, 2019, among ~~Registrant,~~PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., Toronto Branch, and J.P. Morgan Europe Limited, as the Administrative ~~Agents.~~Agents	~~8-K~~-	~~9/12/2019~~-	X
~~10.02~~10.03	First Amendment, dated as of March 23, 2020, to the 364-Day Credit Agreement, dated as of September 11, 2019, among ~~Registrant,~~PayPal Holdings, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as the Administrative ~~Agent.~~Agent	~~8-K~~-	~~9/12/2019~~-	X
10.04	Joinder Agreement, dated as of March 25, 2020, among PayPal International Treasury Centre S.à r.l., PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents	-	-	X
10.05	Joinder Agreement, dated as of March 25, 2020, among PayPal (Europe) S.à r.l. et Cie, S.C.A., PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents	-	-	X
10.06	Joinder Agreement, dated as of March 27, 2020, among PayPal Pte. Ltd., PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents	-	-	X
10.07	Joinder Agreement, dated as of March 31, 2020, among PayPal Australia Pty Limited, PayPal Holdings, Inc., and J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., J.P. Morgan Europe Limited, and JPMorgan Chase Bank, N.A., Toronto Branch, as the Administrative Agents, to the Credit Agreement, dated as of September 11, 2019, among PayPal Holdings, Inc., the Designated Borrowers party thereto, the Lenders party thereto and the Administrative Agents	-	-	X
31.01	Certification of Registrant’s Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.	-	-	X
31.02	Certification of Registrant’s Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.	-	-	X
32.01*	Certification of Registrant’s Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.	-	-	X
32.02*	Certification of Registrant’s Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.	-	-	X

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101	The following financial information related to the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2019,~~March 31, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows; and (vi) the related Notes to Condensed Consolidated Financial Statements.	-	-	X
104	Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.	-	-	X

* The certifications furnished in Exhibits 32.01 and 32.02 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		PayPal Holdings, Inc.
		Principal Executive Officer:

		By:	/s/ Daniel H. Schulman
			Daniel H. Schulman
			President and Chief Executive Officer
Date:	~~October 24, 2019~~May 6, 2020
		Principal Financial Officer:

		By:	/s/ John D. Rainey
			John D. Rainey
			Chief Financial Officer and Executive Vice President, Global Customer Operations
Date:	~~October 24, 2019~~May 6, 2020
		Principal Accounting Officer:

		By:	/s/ Aaron A. Anderson
			Aaron A. Anderson
			Vice President, Chief Accounting Officer
Date:	~~October 24, 2019~~May 6, 2020

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	Three Months Ended September 30, 2018
	(In millions)
	As Previously Reported		Adjustments			Revised

Transaction expense	$	1,366	$	—		$	1,366
Transaction and loan losses	295		—			295
Customer support and operations	367		(17		)	350
Sales and marketing	326		(1		)	325
Product development	269		(269		)	—
Technology and development	—		452			452
General and administrative	354		23			377
Depreciation and amortization	188		(188		)	—
Restructuring and other charges	28		—			28
Total operating expenses	$	3,193	$	—		$	3,193



	Nine Months Ended September 30, 2018
	(In millions)
	As Previously Reported		Adjustments			Revised

Transaction expense	$	4,003	$	—		$	4,003
Transaction and loan losses	934		—			934
Customer support and operations	1,075		(45		)	1,030
Sales and marketing	924		(11		)	913
Product development	782		(782		)	—
Technology and development	—		1,341			1,341
General and administrative	1,061		50			1,111
Depreciation and amortization	553		(553		)	—
Restructuring and other charges	297		—			297
Total operating expenses	$	9,629	$	—		$	9,629



	(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



December 31, 2018⁽¹⁾
(In millions)
Within Original Expected Repayment Period			30 - 59 Days Greater			60 - 89 Days Greater			90 - 180 Days Greater			180+ Days			Total Past Original Expected Repayment Period			Total
$	1,706		$	66		$	32		$	57		$	13		$	168		$	1,874
91.0		%	3.6		%	1.7		%	3.0		%	0.7		%	9.0		%	100		%



		Balance at September 30, 2019
	Maturities	Amount			Effective Interest Rate
		(in millions)
Fixed-rate 2.200% notes	9/26/2022	$	1,000		2.39%
Fixed-rate 2.400% notes	10/1/2024	1,250			2.52%
Fixed-rate 2.650% notes	10/1/2026	1,250			2.78%
Fixed-rate 2.850% notes	10/1/2029	1,500			2.96%
Total term debt		5,000

Unamortized premium (discount) and issuance costs, net		(36		)
Total carrying amount of term debt		$	4,964



	September 30,
	2019		2018⁽¹⁾
Merchant loans and advances
Percent of merchant receivables within original expected or contractual repayment period	90.5	%	90.7	%
Percent of merchant receivables > 90 days outstanding after the end of original expected or contractual repayment period	3.8	%	3.8	%