This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans, or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, mergers or acquisitions, or management strategies). Additionally, our forward-looking statements include expectations related to anticipated impacts of the outbreak of the novel coronavirus. These forward-looking statements can be identified by words such as "may," "will," "would," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "strategy," "future," "opportunity," "plan," "project," "forecast," and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results and financial condition to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in "Item 1A. Risk Factors" of this Form 10-K, as well as in our consolidated financial statements, related notes, and the other information appearing in this report and our other filings with theSecurities and Exchange Commission ("SEC"). We do not intend, and undertake no obligation except as required by law, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should read the following "Management's Discussion and Analysis of Financial Condition and Results of Operations" in conjunction with the audited consolidated financial statements and the related notes that appear in this report. Unless otherwise expressly stated or the context otherwise requires, references to "we," "our," "us," "the Company," and "PayPal" refer toPayPal Holdings, Inc. and its consolidated subsidiaries. This Management's Discussion and Analysis of Financial Condition and Results of Operations focuses on discussion of 2020 results as compared to 2019 results. For discussion of 2019 results as compared to 2018 results, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" within our Form 10-K for the year endedDecember 31, 2019 filed with theSEC onFebruary 6, 2020 . BUSINESS ENVIRONMENT THE COMPANY We are a leading technology platform and digital payments company that enables digital and mobile payments on behalf of merchants and consumers worldwide.PayPal is committed to democratizing financial services to improve the financial health of individuals and to increase economic opportunity for entrepreneurs and businesses of all sizes around the world. Our goal is to enable our merchants and consumers to manage and move their money anywhere in the world, anytime, on any platform, and using any device when sending payments or getting paid. We also facilitate person-to-person ("P2P") payments through ourPayPal , Venmo, and Xoom products and services and simplify and personalize shopping experiences for our consumers through our Honey Platform. Our combined payment solutions, including our corePayPal ,PayPal Credit, Braintree, Venmo, Xoom, iZettle, andHyperwallet products and services, comprise our proprietary Payments Platform.
Regulatory Environment
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened focus by regulators globally on all aspects of the payments industry, including countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. The laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including the changes to their interpretation and implementation, as well as increased penalties and enforcement actions related to non-compliance, could have a material adverse impact on our business, results of operations, and financial condition. We monitor these areas closely and are focused on designing compliant solutions for our customers. [[Image Removed: pypl-20201231_g2.jpg]] 31 -------------------------------------------------------------------------------- Table of Contents Information Security Information security risks for global payments and technology companies like us have increased significantly in recent years. Although we have developed systems and processes designed to protect the data we manage, prevent data loss and other security incidents, and effectively respond to known and potential risks, and expect to continue to expend significant resources to bolster these protections, we remain subject to these risks and there can be no assurance that our security measures will provide sufficient security or prevent breaches or attacks. For additional information regarding our information security risks, see "Item 1A. Risk Factors-Cyberattacks and security vulnerabilities could result in serious harm to our reputation, business, and financial condition."
COVID-19
InMarch 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") as a pandemic. The outbreak has resulted in government authorities and businesses throughout the world implementing numerous measures intended to contain and limit the spread of COVID-19, including travel restrictions, border closures, quarantines, shelter-in-place and lock-down orders, mask and social distancing requirements, and business limitations and shutdowns. These measures have negatively impacted consumer and business spending and payments activity generally, and have significantly contributed to deteriorating macroeconomic conditions and higher unemployment in some countries, including those in which we have significant operations. The spread of COVID-19 has caused us to make significant modifications to our business practices, including enabling most of our workforce to work from home, establishing strict health and safety protocols for our offices, restricting physical participation in meetings, events, and conferences, and imposing restrictions on employee travel. We will continue to actively monitor the situation and may take further actions that may alter our business practices as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, or business partners. While the current macroeconomic environment as a result of the COVID-19 pandemic has adversely impacted general consumer and merchant spending with a more pronounced impact on travel and events verticals, the spread of COVID-19 has also accelerated the shift from in-store shopping and traditional in-store payment methods (e.g. cash) towards e-commerce and digital payments and resulted in increased customer demand for safer payment and delivery solutions (e.g. contactless payment methods, buy online and pick up in store) and a significant increase in online spending in certain verticals that have historically had a strong in-store presence. On balance, our business has benefited from these behavioral shifts, including a significant increase in net new active accounts and payments volume. To the extent that consumer preferences revert to pre-COVID-19 behaviors as mitigation measures to limit the spread of COVID-19 are lifted or relaxed, our business, financial condition, and results of operations could be adversely impacted. The rapidly changing global market and economic conditions as a result of COVID-19 have impacted, and are expected to continue to impact, our operations and business. The broader implications of the COVID-19 pandemic on our business, financial condition, and results of operations remain uncertain. For additional information on how COVID-19 has impacted and could continue to negatively impact our business, see below for specific discussion in the respective areas, and also refer to "Part I, Item 1A, Risk Factors" in this Form 10-K.
BREXIT
TheUnited Kingdom ("U.K.") formally exited theEuropean Union ("EU") and the European Economic Area ("EEA") onJanuary 31, 2020 (commonly referred to as "Brexit") with the expiration of a transition period onDecember 31, 2020 .PayPal (Europe ) S.à.r.l. et Cie, SCA ("PayPal (Europe )") operates in theU.K. within the scope of its passport permissions (as they stood at the end of the transition period) under the Temporary Permissions Regime pending the grant of newU.K. authorizations by theU.K. financial regulators. We are currently unable to determine the longer-term impact that Brexit will have on our business, which will depend, in part, on the implications of new tariff, trade and regulatory frameworks that now govern the provision of cross-border goods and services between theU.K. and the EEA, as well as the financial and operational consequences of the requirement forPayPal (Europe ) to obtain newU.K. authorizations to operate its business longer-term within theU.K. market. For additional information on how Brexit could affect our business, see "Item 1A. Risk Factors-Brexit: TheUnited Kingdom's departure from the EU could harm our business, financial condition, and results of operations." [[Image Removed: pypl-20201231_g2.jpg]] 32 -------------------------------------------------------------------------------- Table of Contents Brexit may contribute to instability in financial, stock, and foreign currency exchange markets, including volatility in the value of the British Pound and Euro. We have foreign currency exchange exposure management programs designed to help reduce the impact from foreign currency exchange rate movements. In 2020, 2019, and 2018, net revenues generated from ourU.K. operations constituted 11% of total net revenues. In 2020, 2019, and 2018, net revenues generated from the EU (excluding theU.K. ) constituted less than 20% of total net revenues. Approximately 50% and 37% of our gross loans and interest receivables as ofDecember 31, 2020 and 2019, respectively, were due from customers in theU.K. Approximately 14% and 6% of our gross loans and interest receivables as ofDecember 31, 2020 and 2019, respectively, were due from customers in the EU (excluding theU.K. ). The increase in the percentage of gross loans and interest receivable outstanding in theU.K. and EU as ofDecember 31, 2020 as compared to 2019 was driven by an increase in the balances in those regions as we continue to originate consumer loans in our international markets, combined with a decline in our gross total loans and interest receivable outstanding due to minimal originations in our merchant credit portfolio as compared to 2019.
OVERVIEW OF RESULTS OF OPERATIONS
The following table provides a summary of our consolidated financial results for
the years ended
Year Ended December 31, Percent Increase/(Decrease) 2020 2019 2018 2020 2019 (In millions, except percentages and per share amounts) Net revenues$ 21,454 $ 17,772 $ 15,451 21 % 15 % Operating expenses 18,165 15,053 13,257 21 % 14 % Operating income 3,289 2,719 2,194 21 % 24 % Operating margin 15 % 15 % 14 % ** ** Other income (expense), net 1,776 279 182 537 % 53 % Income tax expense 863 539 319 60 % 69 % Effective tax rate 17 % 18 % 13 % ** ** Net income$ 4,202 $ 2,459 $ 2,057 71 % 20 % Net income per diluted share$ 3.54 $ 2.07 $ 1.71 71 % 21
%
Net cash provided by operating activities(1)
$ 5,480 44 %
(26) %
All amounts in tables are rounded to the nearest million, except as otherwise noted. As a result, certain amounts may not recalculate using the rounded amounts provided. ** Not Meaningful (1) Prior period amounts have been revised to conform to the current period presentation. Refer to "Note 1-Overview and Summary of Significant Accounting Policies" to our consolidated financial statements included in this Form 10-K for additional information. Net revenues increased$3.7 billion , or 21%, in 2020 as compared to 2019 driven primarily by growth in total payment volume ("TPV", as defined below under "Net Revenues") of 31%. Our acquisition ofHoney Science Corporation ("Honey") contributed approximately one percentage point to the growth rate in 2020. Total operating expenses increased$3.1 billion , or 21%, in 2020 as compared to 2019 due primarily to an increase in transaction expense, and to a lesser extent, increases in technology and development expenses, sales and marketing expenses, transaction and credit losses, and general and administrative expenses. Our acquisitions of Honey and a 70% equity interest inGuofubao Information Technology Co. (GoPay), Ltd. ("GoPay") collectively contributed approximately five percentage points to the growth rate in total operating expenses in 2020. Operating income increased$570 million , or 21%, in 2020 as compared to 2019 due to growth in net revenues, partially offset by an increase in operating expenses. Our operating margin was 15% in both 2020 and 2019. Our acquisitions of Honey and GoPay collectively had a negative impact of approximately three percentage points to our operating margin, which was offset by operating efficiencies. Net income increased by$1.7 billion , or 71%, in 2020 as compared to 2019 due to the previously discussed increase in operating income of$570 million and an increase in other income (expense), net of$1.5 billion , driven primarily by net gains on strategic investments, partially offset by an increase in income tax expense of$324 million , driven primarily by tax expense related to gains on strategic investments. [[Image Removed: pypl-20201231_g2.jpg]] 33 -------------------------------------------------------------------------------- Table of Contents 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 theU.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 theU.S. dollar. In 2020, 2019, and 2018, we generated approximately 49%, 47%, and 46% of our net revenues from customers domiciled outside ofthe United States , respectively. Because we generate substantial net revenues internationally, we are subject to the risks of doing business outside of theU.S. , including those discussed under "Item 1A. Risk Factors." We calculate the year-over-year impact of foreign currency exchange movements on our business using prior period foreign currency exchange rates applied to current period transactional currency amounts. While changes in foreign currency exchange rates affect our reported results, we have a foreign currency exchange exposure management program in which we designate certain foreign currency exchange contracts as cash flow hedges intended to reduce the impact on earnings from foreign currency exchange rate movements. Gains and losses from these foreign currency exchange contracts are recognized as a component of transaction revenues in the same period the forecasted transactions impact earnings. In the years endedDecember 31, 2020 and 2019, the year-over-year foreign currency movements relative to theU.S. dollar had the following impact on our reported results: Year EndedDecember 31, 2020 2019
(In millions) Favorable (unfavorable) impact to net revenues (exclusive of hedging impact)
$ 66 $ (316) Hedging impact 20 238 Favorable (unfavorable) impact to net revenues 86 (78) Favorable impact to operating expense 4 158 Net favorable impact to operating income $
90
While we enter into foreign currency exchange contracts to help reduce the impact on earnings from foreign currency exchange rate movements, it is impossible to predict or eliminate the total effects of this exposure.
We also used a foreign currency exchange contract, designated as a net investment hedge, to reduce the foreign currency exchange risk related to our investment in a foreign subsidiary. Gains and losses associated with this instrument will remain in accumulated other comprehensive income until the foreign subsidiary is sold or substantially liquidated. Additionally, in connection with our services that are paid for in multiple currencies, we generally set our foreign currency exchange rates daily and may face financial exposure if we incorrectly set our foreign currency exchange rates or as a result of fluctuations in foreign currency exchange rates between the times that we set our foreign currency exchange rates. Given that we also have foreign currency exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries, we have an additional foreign currency exchange exposure management program in which we use foreign currency exchange contracts to offset the impact of foreign currency exchange rate movements on our assets and liabilities. The foreign currency exchange gains and losses on our assets and liabilities are recorded in other income (expense), net, and are offset by the gains and losses on the foreign currency exchange contracts. These foreign currency exchange contracts reduce, but do not entirely eliminate, the impact of foreign currency exchange rate movements on our assets and liabilities. [[Image Removed: pypl-20201231_g2.jpg]] 34 --------------------------------------------------------------------------------
Table of Contents FINANCIAL RESULTS NET REVENUES
Our revenues are classified into the following two categories:
•Transaction revenues: Net fees charged to merchants and consumers on a transaction basis primarily based on the TPV completed on our Payments Platform. Growth in TPV is directly impacted by the number of payment transactions that we enable on our Payments Platform. We earn additional fees on transactions where we perform currency conversion, when we enable cross-border transactions (i.e., transactions where the merchant and consumer are in different countries), to facilitate the instant transfer of funds for our customers from theirPayPal or Venmo account to their debit card or bank account, and other miscellaneous fees. •Revenues from other value added services: Net revenues derived primarily from revenue earned through partnerships, referral fees, subscription fees, gateway fees, and other services we provide to our merchants and consumers. We also earn revenues from interest and fees earned primarily on our portfolio of loans receivable, and interest earned on certain assets underlying customer balances.
Our revenues can be significantly impacted by the following:
•The mix of merchants, products, and services; •The mix between domestic and cross-border transactions; •The geographic region or country in which a transaction occurs; and •The amount of our loans receivable outstanding with merchants and consumers.
Active accounts, number of payment transactions, number of payment transactions per active account, and TPV are key non-financial performance metrics ("key metrics") that management uses to measure the performance of our business, and are defined as follows: •An active account is an account registered directly withPayPal 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 toPayPal 's Payments Platform through such third party's login credentials. The number of active accounts provides management with additional perspective on the growth of accounts across our Payments and Honey Platforms as well as the overall scale of our platforms. •Number of payment transactions are the total number of payments, net of payment reversals, successfully completed on our Payments Platform or enabled byPayPal via a partner payment solution, not including gateway-exclusive transactions. •Number of payment transactions per active account reflects the total number of payment transactions within the previous 12-month period, divided by active accounts at the end of the period. 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 byPayPal via a partner payment solution, not including gateway-exclusive transactions. As our transaction revenue is typically correlated with TPV growth and the number of payment transactions completed on our Payments Platform, management uses these metrics to gain insights into the scale and strength of our Payments Platform, the engagement level of our customers, and underlying activity and trends which are indicators of current and future performance. We present these key metrics to enhance investors' evaluation of the performance of our business and operating results. [[Image Removed: pypl-20201231_g2.jpg]] 35 -------------------------------------------------------------------------------- Table of Contents Net Revenue Analysis The components of our net revenue for the years endedDecember 31, 2020 , 2019 and 2018 were as follows (in millions): [[Image Removed: pypl-20201231_g5.jpg]] Transaction revenues Transaction revenues increased by$3.8 billion , or 24%, in 2020 compared to 2019 and were mainly attributable to our corePayPal products and services due primarily to strong growth in TPV and the number of payment transactions, both of which resulted primarily from an increase in our active accounts, and to a lesser extent, an increase in revenue from currency conversion fees. The current macroeconomic environment as a result of the COVID-19 pandemic has adversely impacted general consumer and merchant spending with a more pronounced impact on travel and events verticals. However, we have experienced strong growth in online retail, gaming, and food volume, offsetting this decline. The graphs below present the respective key metrics (in millions) for the years endedDecember 31, 2020 , 2019, and 2018: [[Image Removed: pypl-20201231_g6.jpg]][[Image Removed: pypl-20201231_g7.jpg]][[Image Removed: pypl-20201231_g8.jpg]] *Reflects active accounts at the end of the applicable period. Active accounts as ofDecember 31, 2020 includes 10.2 million active accounts contributed by Honey on the date of acquisition inJanuary 2020 . The following table provides a summary of related metrics: Percent Increase/ Year Ended December 31, (Decrease) 2020 2019 2018 2020 2019 Payment transactions per active account 40.9 40.6 36.9 1 % 10 % Percent of cross-border TPV 17 % 18 % 19 % ** ** ** Not meaningful [[Image Removed: pypl-20201231_g2.jpg]] 36 -------------------------------------------------------------------------------- Table of Contents Transaction revenues grew more slowly than TPV, which grew 31%, and the number of payment transactions, which grew 25%, in 2020 compared to 2019 due primarily to a higher proportion of P2P transactions (primarily from our Venmo products) from which we earn lower fees, a decline in hedging gains, and a higher portion of TPV generated by platform partners and large merchants who generally pay lower rates with higher transaction volumes. Changes in prices charged to our customers did not significantly impact transaction revenue growth in 2020.
Revenues from other value added services
Revenues from other value added services decreased by$137 million , or 8%, in 2020 compared to 2019 due primarily to a decline in interest earned on certain assets underlying customer account balances resulting from lower interest rates and a decrease in interest and fee income on our loans and advances receivable due to an increase in the allowance for expected credit losses against interest and fees receivable, a decline in originations, and payment holidays that we provided during the year to our customers as a part of our COVID-19 payment relief initiatives. Additionally, the decline in revenues from other value added services was driven by a decline in revenue earned from transition servicing activities provided toSynchrony Bank ("Synchrony"), which ended in the second quarter of 2019. This decline was partially offset by incremental revenues from our acquisition of Honey, which contributed approximately 15 percentage points to the revenue growth rate for other value added services in 2020, and an increase in our revenue share earned from Synchrony. The total gross consumer and merchant loans receivable balance as ofDecember 31, 2020 and 2019 was$3.6 billion and$4.2 billion , respectively. The year-over-year decrease of 15% in 2020 compared to 2019 was driven by a decline in our merchant receivable portfolio due to reduced originations, partially offset by growth in our consumer receivable portfolio. In response to the COVID-19 pandemic, we have taken both proactive and reactive measures to support our merchants and consumers that have loans and interest receivables due to us under our credit product offerings. These measures were intended to reduce financial difficulties experienced by our customers and included providing payment holidays to grant payment deferrals to certain borrowers for varying periods of time, and amended payment terms through loan modifications in certain cases. These measures have adversely impacted and are expected to continue to adversely impact the recognition of interest and fee income in future periods. Given the uncertainty surrounding the COVID-19 pandemic, including its duration and severity and the ultimate impact it may have on the financial condition of our merchants and consumers, the extent of these types of actions and their prospective impact on our interest and fee income is not determinable. In addition, consumers that have outstanding loans and interest receivable due to Synchrony may experience similar hardships that result in increased losses recognized by Synchrony, which may result in a decrease in our revenue share earned from Synchrony in future periods. In the event the overall return on thePayPal branded credit programs funded by Synchrony does not meet a minimum rate of return ("minimum return threshold") in a particular quarter, our revenue share for that period would be zero. Further, in the event the overall return on thePayPal branded credit programs managed by Synchrony does not meet the minimum return threshold as measured over four consecutive quarters and in the following quarter, we would be required to make a payment to Synchrony, subject to certain limitations. ThroughDecember 31, 2020 , the overall return on thePayPal branded credit programs funded by Synchrony exceeded the minimum return threshold. OPERATING EXPENSES The following table summarizes our operating expenses and related metrics we use to assess the trends in each: Percent Increase/ Year Ended December 31, (Decrease) 2020 2019 2018 2020 2019 (In millions, except percentages) Transaction expense$ 7,934 $ 6,790 $ 5,581 17 % 22 % Transaction and credit losses 1,741 1,380 1,274 26 % 8 % Customer support and operations 1,778 1,615 1,407 10 % 15 % Sales and marketing 1,861 1,401 1,314 33 % 7 % Technology and development 2,642 2,085 1,831 27 % 14 % General and administrative 2,070 1,711 1,541 21 % 11 % Restructuring and other charges 139 71 309 96 % (77) % Total operating expenses$ 18,165 $ 15,053 $ 13,257 21 % 14 % Transaction expense rate(1) 0.85 % 0.95 % 0.96 % ** ** Transaction and credit loss rate(2) 0.19 % 0.19 % 0.22 % ** ** (1) Transaction expense rate is calculated by dividing transaction expense by TPV. (2) Transaction and credit loss rate is calculated by dividing transaction and credit losses by TPV. ** Not meaningful. [[Image Removed: pypl-20201231_g2.jpg]] 37 -------------------------------------------------------------------------------- Table of Contents Transaction expense Transaction expense is primarily composed of the costs we incur to accept a customer's funding source of payment. These costs include fees paid to payment processors and other financial institutions to draw funds from a customer's credit or debit card, bank account, or other funding source they have stored in their digital wallet. Transaction expense also includes fees paid to disbursement partners to enable a transaction. We refer to the allocation of funding sources used by our consumers as our "funding mix." The cost of funding a transaction with a credit or debit card is generally higher than the cost of funding a transaction from a bank or through internal sources such as aPayPal or Venmo account balance orPayPal Credit. As we expand the availability and presentation of alternative funding sources to our customers, our funding mix may change, which could increase or decrease our transaction expense rate. The cost of funding a transaction is also impacted by the geographic region or country in which a transaction occurs because we generally pay lower rates for transactions funded with credit cards outside theU.S. than in theU.S. Our transaction expense rate is impacted by changes in product mix, merchant mix, regional mix, funding mix, and assessments charged by payment processors and other financial institutions when we draw funds from a customer's credit or debit card, bank account, or other funding sources. Macroeconomic environment changes may also result in behavioral shifts in consumer spending patterns affecting the type of funding source they use, which also impacts the funding mix. [[Image Removed: pypl-20201231_g9.jpg]] Transaction expense increased by$1.1 billion , or 17%, in 2020 compared to 2019 and was primarily attributable to an increase in TPV of 31%. The decrease in transaction expense rate in 2020 compared to 2019 was due primarily to favorable changes in product mix and funding mix. For the years endedDecember 31, 2020 , 2019, and 2018, approximately 2% of TPV was funded withPayPal Credit. For the years endedDecember 31, 2020 , 2019, and 2018, approximately 40%, 41%, and 43% of TPV, respectively, was generated outside of theU.S.
Transaction and credit losses
Transaction losses include the expense associated with our buyer and seller protection programs, fraud, and chargebacks. Credit losses include the losses associated with our merchant and consumer loans receivable portfolio. Beginning in 2020, these losses are based on current expected credit losses. Our transaction and credit losses fluctuate depending on many factors, including TPV, current and projected macroeconomic conditions including unemployment rates, merchant insolvency events, changes to and usage of our customer protection programs, the impact of regulatory changes, and the credit quality of loans receivable arising from transactions funded with our credit products for consumers and loans and advances to merchants. [[Image Removed: pypl-20201231_g2.jpg]] 38 -------------------------------------------------------------------------------- Table of Contents The components of our transaction and credit losses (in millions) for the years endedDecember 31, 2020 , 2019, and 2018 were as follows: [[Image Removed: pypl-20201231_g10.jpg]]
Transaction and credit losses increased by
Transaction loss rate (transaction losses divided by TPV) was 0.12%, 0.15%, and
0.18% for the years ended
Transaction losses increased by$43 million , or 4%, in 2020 compared to 2019 due to growth in TPV, partially offset by benefits realized through improvements in risk management capabilities, which also contributed to a decrease in our transaction loss rate over the same period. The duration and severity of the impacts of the COVID-19 pandemic remain unknown. The negative impact on macroeconomic conditions could increase the risk of merchant bankruptcy, insolvency, business failure, or other business interruption, which may adversely impact our transaction losses, particularly for merchants that sell goods or services in advance of the date of their delivery or use. Credit losses increased by$318 million , or 110%, in 2020 compared to 2019 due primarily to an increase in provisions for our loans and interest receivable associated with changes in current and projected macroeconomic conditions, including qualitative adjustments to account for the impact of limitations in our expected credit loss models that have arisen due to the extreme fluctuations in both the actual and projected macroeconomic conditions during the period as well as to incorporate varying degrees of merchant performance in the current environment and expected performance in future periods. Our estimate of the macroeconomic impact on current expected credit losses is most significantly impacted by projected unemployment trends and benchmark credit card charge-off rates, which directly correlate to the forecast of loans and interest receivables that we expect to charge off in the future. Credit losses for the year endedDecember 31, 2020 include the impact of the increase in actual unemployment rates and credit card charge-off rates during the current period and expectations of a prolonged economic recovery period over which the value of loans and interest receivable that charge-off are projected to exceed historical trends. If the actual unemployment and charge-offs vary from these projections as ofDecember 31, 2020 , the credit losses recognized in future periods will be impacted. The consumer loans and interest receivables balance as ofDecember 31, 2020 and 2019 was$2.2 billion and$1.3 billion , respectively. The year-over-year increase of 64% in 2020 compared to 2019 was due to growth ofPayPal Credit in international markets and, to a lesser extent, growth of our installment credit products in theU.S. and international markets. Approximately 77% and 94% of our consumer loans receivables outstanding as ofDecember 31, 2020 and 2019, respectively, were due from consumers in theU.K. [[Image Removed: pypl-20201231_g2.jpg]] 39 -------------------------------------------------------------------------------- Table of Contents The following table provides information regarding the credit quality of our consumer loans and interest receivable balance:
2020 2019
Percent of consumer loans and interest receivables current (1),(2)
97.9 % 96.7 %
Percent of consumer loans and interest receivables > 90 days outstanding (1), (2), (3)
0.9 % 1.5 % Net charge off rate(4) 2.4 % 4.1 % (1) Prior period revised to conform to the current period presentation. (2) Includes the impact of payment holidays provided by the Company as a part of our COVID-19 payment relief initiatives. (3) Represents percentage of balances which are 90 days past the billing date to the consumer. (4) Net charge off rate is the annual ratio of net credit losses, excluding fraud losses, on consumer loans receivables as a percentage of the average daily amount of consumer loans and interest receivables balance during the period. The decrease in the net charge off rate for consumer receivables atDecember 31, 2020 as compared toDecember 31, 2019 was primarily attributable to the continued expansion and maturity of our international consumer loan receivable portfolio and was in-part favorably impacted in the current year by payment holidays provided by the Company as a part of our COVID-19 payment relief initiatives. We offer access to credit products for certain small and medium-sized merchants, which we refer to as our merchant lending offerings. Total merchant loans, advances, and interest and fees receivable outstanding, net of participation interest sold, as ofDecember 31, 2020 and 2019 were$1.4 billion and$2.8 billion , respectively. The year-over-year decrease of 51% in 2020 compared to 2019 was due primarily to a reduction in originations due to modifications in our acceptable risk parameters as well as a shift towards merchants borrowing through theU.S. Government's Paycheck Protection Program ("PPP") administered by theU.S. Small Business Administration ("SBA") and enacted inMarch 2020 under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in response to the COVID-19 pandemic. We do not own the receivables associated with loans originated through the PPP. Approximately 81% and 10% of our merchant receivables outstanding as ofDecember 31, 2020 were due from merchants in theU.S. andU.K. , as compared to 83% and 10% as ofDecember 31, 2019 , respectively.
The following table provides information regarding the credit quality of our merchant loans, advances, and interest and fees receivable balance:
2020 2019
Percent of merchant receivables within original expected or contractual repayment period
75.4 % 89.6 %
Percent of merchant receivables > 90 days outstanding after the end of original expected or contractual repayment period (1)
12.5 % 4.2 % Net charge off rate (2) 18.9 % 7.4 % (1) Includes the impact of payment holidays and modification programs provided by the Company as a part of our COVID-19 payment relief initiatives. (2) Net charge off rate is the annual ratio of net credit losses, excluding fraud losses, on merchant loans and advances as a percentage of the average daily amount of merchant loans, advances, and interest and fees balance during the period. The decline in the percent of merchant receivables within the original expected or contractual repayment period, increase in percent of merchant receivables greater than 90 days outstanding, and increase in the net charge off rate for merchant receivables atDecember 31, 2020 as compared toDecember 31, 2019 was primarily due to an increase in payment delinquency driven by financial difficulties experienced by our merchants associated with the economic impact of COVID-19 and a significant decline in our outstanding merchant receivables balance due to repayments and reduced originations, which increases net charge offs and delinquency rates presented as a percentage of our outstanding loan balance. Beginning in the third quarter of 2020, we have granted certain merchants loan modifications intended to provide them with financial relief and to help enable us to mitigate losses. The associated loans and interest receivables have been treated as troubled debt restructurings due to significant changes in their structure, including repayment terms and fee/rate structure. For additional information, see "Note 11-Loans and Interest Receivable" in the notes to our consolidated financial statements included in this Form 10-K. [[Image Removed: pypl-20201231_g2.jpg]] 40 -------------------------------------------------------------------------------- Table of Contents During the year endedDecember 31, 2020 , modifications to the acceptable risk parameters of our credit products in response to the impacts of the COVID-19 pandemic resulted in the implementation of a number of risk mitigation strategies, including reduction of maximum loan size, tightening eligibility terms, and a shift from automated to manual underwriting of loans and advances. These changes in acceptable risk parameters have resulted in a deceleration in the growth of our borrowing base and a decrease in merchant receivables as ofDecember 31, 2020 , as compared to 2019. While the impact of COVID-19 on the economic environment remains uncertain, the longer and more severe the pandemic, the more likely it is to have a material adverse impact on our borrowing base, which is primarily comprised of small and medium-sized merchants. For additional information, see "Note 11-Loans and Interest Receivable" in the notes to the consolidated financial statements, and "Item 1A. Risk Factors-Our credit products expose us to additional risks." included in this Form 10-K.
Customer support and operations
Customer support and operations includes (a) costs incurred in our global customer operations centers, including costs to provide call support to our customers, (b) costs to support our trust and security programs protecting our merchants and consumers, and (c) other costs incurred related to the delivery of our products, including payment devices, card production, and customer onboarding and compliance costs. [[Image Removed: pypl-20201231_g11.jpg]] Customer support and operations costs increased$163 million , or 10%, in 2020 compared to 2019. The increase in 2020 was primarily attributable to an increase in employee-related expenses and contractors and consulting costs mainly in our operations function that support the growth of our active accounts and payment transactions, as well as customer onboarding and compliance costs.
Sales and marketing
Sales and marketing includes costs incurred for customer acquisition, business development, advertising, and marketing programs.
[[Image Removed: pypl-20201231_g12.jpg]] Sales and marketing expenses increased$460 million , or 33%, in 2020 compared to 2019 due primarily to higher spend on marketing programs and employee-related expenses. Our acquisitions of Honey and GoPay collectively contributed approximately 20 percentage points to the growth rate of sales and marketing expenses in 2020. [[Image Removed: pypl-20201231_g2.jpg]] 41 -------------------------------------------------------------------------------- Table of Contents 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. [[Image Removed: pypl-20201231_g13.jpg]] Technology and development expenses increased$557 million , or 27%, in 2020 compared to 2019 due primarily to increases in employee-related expenses, amortization of acquired intangibles, data center and cloud computing services utilized in delivering our products, and costs related to contractors and consultants. Our acquisitions of Honey and GoPay collectively contributed approximately 15 percentage points to the growth rate of technology and development expenses in 2020. General and administrative General and administrative includes costs incurred to provide support to our business, including legal, human resources, finance, risk, compliance, executive, and other support operations. [[Image Removed: pypl-20201231_g14.jpg]] General and administrative expenses increased$359 million , or 21%, in 2020 compared to 2019 due primarily to increases in employee-related expenses, professional services expenses, including those attributable to acquisition related transaction expenses, and amortization of acquired intangibles and internally developed software used in our general and administrative functions. Our acquisitions of Honey and GoPay collectively contributed approximately 13 percentage points to the growth rate of general and administrative expenses in 2020. [[Image Removed: pypl-20201231_g2.jpg]] 42 -------------------------------------------------------------------------------- Table of Contents Restructuring and other charges Restructuring and other charges primarily consist of restructuring expenses and, in 2018, cost adjustments related to our loans and receivables, held for sale portfolio. [[Image Removed: pypl-20201231_g15.jpg]]
Restructuring and other charges increased by
During the first quarter of 2020, management approved a strategic reduction of the existing global workforce, which resulted in restructuring charges of$109 million . The approved strategic reduction in 2020 is part of a multiphase process to reorganize our workforce concurrently with the redesign of our operating structure, which spanned multiple quarters. We primarily incurred employee severance and benefits costs, as well as other associated consulting costs under the 2020 strategic reduction. We have experienced delays, primarily as a result of COVID-19, in the execution of these restructuring actions, which are now expected to be completed by the end of the first quarter of 2021.
Additionally, in 2020, we incurred asset impairment charges of
In the first quarter of 2019, management approved strategic reductions of the existing global workforce, which resulted in restructuring charges of$78 million . The approved strategic reductions for 2019 were intended to better align our teams to support key business priorities and included the transfer of certain operational functions between geographies, as well as the impact of the transition of servicing activities provided to Synchrony, which ended in the second quarter of 2019. We primarily incurred employee and severance benefits expenses under the 2019 strategic reductions, which were substantially completed by the end of the first quarter of 2020.
For information on the associated restructuring liability, see "Note 17-Restructuring and Other Charges" in the notes to the consolidated financial statements included in this Form 10-K.
Other income (expense), net
Other income (expense), net increased$1.5 billion , or 537%, in 2020 compared to 2019 primarily driven by net gains on strategic investments of$1.7 billion due primarily to favorable changes in fair value related to our marketable equity securities. This increase was partially offset by a decline in interest income driven by lower interest rates as well as incremental interest expense associated with our fixed rate notes issued in the third quarter of 2019 and second quarter of 2020. Income tax expense Our effective tax rate was 17% in 2020 and 18% in 2019. The decrease in our effective tax rate in 2020 was primarily the result of favorable discrete tax adjustments, partially offset by taxes associated with gains on strategic investments. See "Note 16-Income Taxes" to the consolidated financial statements included in this Form 10-K for more information on our effective tax rate. [[Image Removed: pypl-20201231_g2.jpg]] 43 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES We require liquidity and access to capital to fund our global operations, including customer protection programs, our credit products, capital expenditures, investments in our business, potential acquisitions and strategic investments, working capital, and other cash needs. The following table summarizes our cash, cash equivalents, and investments as ofDecember 31, 2020 and 2019: Year Ended December 31, 2020 2019 (In millions) Cash, cash equivalents, and investments(1)(2)$ 15,852
(1) Excludes assets related to funds receivable and customer accounts of
Foreign Cash, Cash Equivalents, and Investments
Cash, cash equivalents, and investments held by our foreign subsidiaries were$7.0 billion atDecember 31, 2020 and$7.2 billion atDecember 31, 2019 , or 44% and 61% of our total cash, cash equivalents, and investments as of those respective dates. AtDecember 31, 2020 , all of our cash, cash equivalents, and investments held by foreign subsidiaries were subject toU.S. taxation under Subpart F, Global Intangible Low Taxed Income ("GILTI"), or the one-time transition tax. Subsequent repatriations to theU.S. will not be taxable from aU.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
InMay 2020 andSeptember 2019 , we issued fixed rate notes with varying maturity dates for an aggregate principal amount of$9.0 billion (collectively referred to as the "Notes"). Proceeds from the issuance of these Notes may be used for general corporate purposes, which may include funding the repayment or redemption of outstanding debt, share repurchases, ongoing operations, capital expenditures, and possible acquisitions of businesses, assets, or strategic investments. As ofDecember 31, 2020 , we had$9.0 billion in fixed rate debt outstanding with varying maturity dates. InSeptember 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. InMarch 2020 , we drew down$3.0 billion under the Credit Agreement. InMay 2020 , we repaid the$3.0 billion using proceeds from theMay 2020 debt issuance. As ofDecember 31, 2020 , no borrowings were outstanding under the Credit Agreement and as such,$5.0 billion of borrowing capacity was available for the purposes permitted by the Credit Agreement, subject to customary conditions to borrowing. Additionally, inSeptember 2019 , we entered into a 364-day credit agreement that provided for an unsecured$1.0 billion 364-day revolving credit facility, which terminated inSeptember 2020 . We maintain an uncommitted credit facility with a borrowing capacity of approximately$30 million , where we can withdraw and utilize the funds at our discretion for general corporate purposes. As ofDecember 31, 2020 , the majority of the borrowing capacity under this credit facility was available, subject to customary conditions to borrowing.
For additional information, see "Note 12-Debt" to our consolidated financial statements included in this Form 10-K.
We have a cash pooling arrangement with a financial institution for cash management purposes. The arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the financial institution ("Aggregate Cash Deposits"). The arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income under the arrangement. As ofDecember 31, 2020 , we had a total of$3.9 billion in cash withdrawals offsetting our$3.9 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement. [[Image Removed: pypl-20201231_g2.jpg]] 44 -------------------------------------------------------------------------------- Table of Contents Liquidity for Loans Receivable Growth in our portfolio of loan receivables increases our liquidity needs, and any inability to meet those liquidity needs could adversely affect our business. We continue to evaluate partnerships and third party sources of funding for our loans receivable portfolio. InJune 2018 , theLuxembourg Commission de Surveillance du Secteur Financier (the "CSSF") agreed thatPayPal 's management may designate up to 35% of European customer balances held in our Luxembourg banking subsidiary to be used for European andU.S. credit activities. As ofDecember 31, 2020 , the cumulative amount approved by management to be designated for credit activities aggregated to$2.0 billion and represented approximately 21% of European customer balances potentially available for our corporate use at that date as determined by applying financial regulations maintained by the CSSF. We may periodically seek to designate additional amounts of customer balances, if necessary, based on utilization of the approved funds and anticipated credit funding requirements. 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. InApril 2020 ,PayPal was approved to participate in the PPP administered by the SBA. The program was designed to provide a direct incentive for small businesses to keep their workers on payroll during the COVID-19 pandemic and includes initial loan repayment deferrals and debt forgiveness provisions for eligible borrowers. Loans made under this program are funded by an independent chartered financial institution that we partner with, and the related receivables are not purchased byPayPal . We receive a fee for providing origination services and loan servicing for the loans and retain operational risk related to those activities.
Credit Ratings
As ofDecember 31, 2020 , we continue to be rated investment grade byStandard and Poor's Financial Services, LLC ,Fitch Ratings, Inc. , andMoody's Investors Services Inc. We expect that these credit rating agencies will continue to monitor our performance, including our capital structure and results of operations. Our goal is to be rated investment grade, but as circumstances change, there are factors that could result in our credit ratings being downgraded or put on a watch list for possible downgrading. If that were to occur, it could increase our borrowing rates, including the interest rate on borrowings under our credit agreement.
Risk of Loss
The risk of losses from our buyer and seller protection programs are specific to individual customers, merchants, and transactions, and may also be impacted by regional variations in, and changes or modifications to, the programs, including as a result of changes in regulatory requirements. For the periods presented in these consolidated financial statements included in this report, our transaction loss rates ranged between 0.12% and 0.18% of TPV. Historical loss rates may not be indicative of future results. The duration and severity of the impacts of the COVID-19 pandemic remain unknown. Its negative impact on macroeconomic conditions could increase the risk of merchant bankruptcy, insolvency, business failure, or other business interruption, which may result in an adverse impact on our transaction losses, particularly for merchants that sell goods or services in advance of the date of their delivery or use.
Stock Repurchases and Acquisitions
During the year endedDecember 31, 2020 , we repurchased approximately$1.6 billion of our common stock in the open market under our stock repurchase programs authorized inApril 2017 andJuly 2018 . TheJuly 2018 stock repurchase program became effective during the first quarter of 2020 upon completion of theApril 2017 stock repurchase program. As ofDecember 31, 2020 , a total of approximately$8.4 billion remained available for future repurchases of our common stock under ourJuly 2018 stock repurchase program. For additional information, see "Note 14-Stock Repurchase Programs" to our consolidated financial statements included in this Form 10-K. InJanuary 2020 , we completed our acquisition of Honey for approximately$3.6 billion in cash and approximately$400 million in assumed restricted stock, restricted stock units, and options, subject to vesting conditions. We believe our acquisition of Honey will enhance our value proposition by allowing us to further simplify and personalize shopping experiences for consumers while driving conversion and increasing consumer engagement and sales for merchants. For additional information, see "Note 4-Business Combinations" in the notes to the consolidated financial statements included in this Form 10-K. [[Image Removed: pypl-20201231_g2.jpg]] 45 -------------------------------------------------------------------------------- Table of Contents Other Considerations In the second quarter of 2020, we announced our commitment to invest$530 million to support racial equality. The investments will include: charitable contributions, grants to small businesses, internal investments to support and strengthen diversity and inclusion initiatives, and an economic opportunity fund, which will include bolstering our relationships with community banks and credit unions serving underrepresented minority communities, as well as investing directly into black- and minority-led startups and minority-focused investment funds. Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating, our financial performance, and global credit market conditions, as well as a broad range of other factors, including those related to the COVID-19 pandemic discussed in this Form 10-K. In addition, our liquidity, access to capital, and borrowing costs could also be negatively impacted by the outcome of any of the legal or regulatory proceedings to which we are a party. See "Item 1A. Risk Factors" and "Note 13-Commitments and Contingencies" to our consolidated financial statements included in this Form 10-K for additional discussion of these and other risks that our business faces. We believe that our existing cash, cash equivalents, and investments, cash expected to be generated from operations, and our expected access to capital markets, together with potential external funding through third party sources, will be sufficient to fund our operating activities, anticipated capital expenditures, and our credit products for the foreseeable future. Depending on market conditions, we may from time to time issue debt, including in private or public offerings, to fund our operating activities, finance acquisitions, make strategic investments, repurchase shares under our stock repurchase program, or reduce our cost of capital. CASH FLOWS
The following table summarizes our consolidated statements of cash flows:
Year Ended December 31, 2020 2019 2018 (In millions) Net cash provided by (used in): Operating activities(1)$ 5,854 $ 4,071 $ 5,480 Investing activities(1) (16,218) (5,742) 821 Financing activities(1) 12,492 4,187 (1,240)
Effect of exchange rates on cash, cash equivalents, and restricted cash
169 (6) (113)
Net increase in cash, cash equivalents, and restricted cash
(1) Prior period amounts have been revised to conform to the current period presentation. Refer to "Note 1-Overview and Summary of Significant Accounting Policies" to our consolidated financial statements included in this Form 10-K for additional information. Operating Activities Cash flows from operating activities includes net income adjusted for certain non-cash expenses, timing differences between expenses recognized for provision for transaction and credit losses and actual cash transaction losses incurred, and changes in other assets and liabilities. Significant non-cash expenses for the period include depreciation and amortization and stock-based compensation. The cash impact from actual transaction losses incurred during a period is reflected as a negative impact to changes in other assets and liabilities in cash from operating activities. The expenses recognized during the period for provision for credit losses are estimates of current expected credit losses on our merchant and consumer credit products. Actual charge-offs of receivables related to our merchants and consumer credit products have no impact on cash from operating activities. We generated cash from operating activities of$5.9 billion in 2020 due primarily to operating income of$3.3 billion , as well as adjustments for non-cash expenses including: provision for transaction and credit losses of$1.7 billion , stock-based compensation of$1.4 billion , and depreciation and amortization of$1.2 billion . Net income was also adjusted for net gains on our strategic investments of$1.9 billion in 2020, and changes in other assets and liabilities primarily related to actual cash transaction losses incurred during the period of$1.1 billion and an increase in other assets of$498 million , partially offset by an increase in other liabilities of$1.0 billion . [[Image Removed: pypl-20201231_g2.jpg]] 46 -------------------------------------------------------------------------------- Table of Contents We generated cash from operating activities of$4.1 billion in 2019 due primarily to operating income of$2.7 billion . During 2019, adjustments for non-cash expenses included provision for transaction and credit losses of$1.4 billion , stock-based compensation of$1.0 billion , and depreciation and amortization of$912 million , partially offset by adjustments related to deferred income taxes of$269 million and net unrealized gains on our strategic investments of$208 million . The cash generated from operating activities was negatively impacted by changes in other assets and liabilities primarily related to actual cash transaction losses incurred during the period of$1.1 billion , an increase in other assets of$566 million and accounts receivable of$120 million , partially offset by an increase in other liabilities of$722 million . We generated cash from operating activities of$5.5 billion in 2018 due primarily to operating income of$2.2 billion and the positive impact of$1.4 billion of changes in loans and interest receivable, held for sale, net following the sale of ourU.S. consumer credit receivables portfolio. During 2018, adjustments for non-cash expenses included provision for transaction and credit losses of$1.3 billion , stock-based compensation of$853 million , depreciation and amortization of$776 million , and cost basis adjustments to loans and interest receivable held for sale of$244 million . The cash generated from operating activities was also impacted by changes in other assets and liabilities, primarily related to actual cash transaction losses incurred during the period of$1.0 billion , partially offset by an increase in other liabilities of$428 million .
Cash paid for income taxes, net in 2020, 2019, and 2018 was
Investing Activities
Cash flows from investing activities includes purchases, maturities and sales of investments, cash paid for acquisitions and strategic investments, purchases and sales of property and equipment, changes in principal loans receivable, and funds receivable. The net cash used in investing activities of$16.2 billion in 2020 was due primarily to purchases of investments of$41.5 billion , acquisitions (net of cash acquired) of$3.6 billion , changes in funds receivable from customers of$1.6 billion , and purchases of property and equipment of$866 million . These cash outflows were partially offset by maturities and sales of investments of$30.9 billion , changes in principal loans receivable, net of$294 million , and proceeds from the sale of property and equipment of$120 million . The net cash used in investing activities of$5.7 billion in 2019 was due primarily to purchases of investments of$27.9 billion , changes in principal loans receivable, net of$1.6 billion , purchases of property and equipment of$704 million , and changes in funds receivable from customers of$351 million . These cash outflows were partially offset by maturities and sales of investments of$24.9 billion . We generated cash from investing activities of$821 million in 2018 due primarily to maturities and sales of investments of$21.9 billion , changes in principal loans receivable, net of$3.1 billion , and changes in funds receivable from customers of$1.1 billion . These cash inflows were offset by purchases of investments of$22.4 billion , acquisitions of$2.1 billion (net of cash and restricted cash acquired), and purchases of property and equipment of$823 million .
Financing Activities
Cash flows from financing activities includes proceeds from issuance of common stock, purchases of treasury stock, tax withholdings related to net share settlements of equity awards, borrowings and repayments under financing arrangements, and funds payable and amounts due to customers.
We generated cash from financing activities of$12.5 billion in 2020 due primarily to changes in funds payable and amounts due to customers of$10.6 billion and$7.0 billion of cash proceeds from the issuance of long-term debt in the form of fixed rate notes, as well as proceeds from borrowings under our Credit Agreement. These cash inflows were partially offset by the repayment of outstanding borrowings under our Credit Agreement of$3.0 billion , the repurchase of$1.6 billion of our common stock under our stock repurchase program, and tax withholdings related to net share settlement of equity awards of$521 million . We generated cash from financing activities of$4.2 billion in 2019 due primarily to$5.5 billion of cash proceeds from the issuance of long-term debt in the form of fixed rate notes as well as borrowings under a previous credit agreement, and changes in funds payable and amounts due to customers of$3.0 billion . These cash inflows were partially offset by repayment of borrowings under a previous credit agreement of$2.5 billion , the repurchase of$1.4 billion of our common stock under our stock repurchase programs, and tax withholdings related to net share settlement of equity awards of$504 million . [[Image Removed: pypl-20201231_g2.jpg]] 47 -------------------------------------------------------------------------------- Table of Contents The net cash used in financing activities of$1.2 billion in 2018 was due primarily to the repurchase of$3.5 billion of our common stock under our stock repurchase programs, repayments of borrowing under financing arrangements of$1.1 billion , and tax withholdings related to net share settlement of equity awards of$419 million , partially offset by cash inflows from borrowings under financing arrangements of$2.1 billion and changes in funds payable and amounts due to customers of$1.6 billion .
Effect of Exchange Rates on Cash, Cash Equivalents, and Restricted Cash
Foreign currency exchange rates had a positive impact of$169 million , a negative impact of$6 million , and a negative impact of$113 million on cash, cash equivalents, and restricted cash during 2020, 2019, and 2018, respectively. The positive impact in 2020 was due to the weakening of theU.S. dollar against certain foreign currencies, primarily the Australian dollar. The negative impact in 2018 was due to the strengthening of theU.S. dollar against certain foreign currencies, primarily the Australian dollar and to a lesser extent, the Euro.
OFF-BALANCE SHEET ARRANGEMENTS
As ofDecember 31, 2020 and 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.
FUTURE LIQUIDITY AND OBLIGATIONS
As ofDecember 31, 2020 , approximately$3.0 billion of unused credit was available toPayPal Credit account holders compared to$3.1 billion of unused credit as ofDecember 31, 2019 . Substantially all of thePayPal Credit account holders with unused credit are in the U.K. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all ourPayPal Credit account holders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination based on, among other things, account usage and customer creditworthiness. We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes. Changes in our business needs, contractual cancellation provisions, fluctuating interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of these payments. The following table summarizes our obligations as ofDecember 31, 2020 that are expected to impact liquidity and cash flow in future periods. We believe we will be able to fund these obligations through our existing cash and investment portfolio and cash expected to be generated from operations. Purchase Operating Obligations Leases Transition Tax Long-term Debt Total Payments Due During the Year Ending December 31, (In millions) 2021$ 409 $ 171 $ 114 $ 213$ 907 2022 239 140 114 1,213 1,706 2023 129 126 212 1,185 1,652 2024 134 116 284 1,428 1,962 2025 60 100 354 1,140 1,654 Thereafter 52 277 - 5,854 6,183$ 1,023 $ 930 $ 1,078 $ 11,033 $ 14,064
The significant assumptions used in our determination of amounts presented in the above table are as follows:
•Purchase obligation amounts include minimum purchase commitments for advertising, capital expenditures (computer equipment, software applications, engineering development services, and construction contracts), data center and cloud computing services, and other goods and services entered into in the ordinary course of business. •Operating lease amounts include minimum rental payments under our non-cancelable operating leases (including leases not yet commenced) primarily for office and data center facilities. The amounts presented are consistent with contractual terms and are not expected to differ significantly from actual results under our existing leases, unless a substantial change in our headcount needs requires us to expand our occupied space or exit an office facility early. [[Image Removed: pypl-20201231_g2.jpg]] 48
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•Transition tax represents the one-time mandatory tax on previously deferred foreign earnings under the Tax Cuts and Jobs Act.
•Long-term debt amounts represent the future principal and interest payments (based on contractual interest rates) on our fixed-rate debt. For more information, see "Note 12-Debt" to our consolidated financial statements included in this Form 10-K.
As we are unable to reasonably predict the timing of settlement of liabilities related to unrecognized tax benefits, net, the table above does not include$1.4 billion of such non-current liabilities included in deferred and other tax liabilities recorded on our consolidated balance sheet as ofDecember 31, 2020 .
SEASONALITY
The Company does not experience meaningful seasonality with respect to net revenues. No individual quarter in 2020, 2019, or 2018 accounted for more than 30% of annual net revenue.
CRITICAL ACCOUNTING POLICES AND ESTIMATES
The application ofU.S. GAAP requires us to make estimates and assumptions about certain items and future events that directly affect our reported financial condition. We have established detailed policies and control procedures to provide reasonable assurance that the methods used to make estimates and assumptions are well controlled and are applied consistently from period to period. The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to our financial statements. An accounting estimate is considered critical if both (a) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (b) the impact within a reasonable range of outcomes of the estimate and assumption is material to our financial condition. Senior management has discussed the development, selection, and disclosure of these estimates with the Audit, Risk, and Compliance Committee of our Board of Directors. Our significant accounting policies, including recent accounting pronouncements, are described in "Note 1-Overview and Summary of Significant Accounting Policies" to the consolidated financial statements included in this Form 10-K. A quantitative sensitivity analysis is provided where information is available to reasonably estimate the impact, and provides material information to investors. The amounts used to assess sensitivity are included to allow users of this report to understand a general directional cause and effect of changes in the estimates and do not represent management's predictions of variability. For all of these estimates, it should be noted that future events rarely develop exactly as forecasted, and estimates require regular review and adjustment.
TRANSACTION AND CREDIT LOSSES
Transaction and credit losses include the expense associated with our customer protection programs, fraud, chargebacks, and credit losses associated with our loans receivable balances. Our transaction and credit losses fluctuate depending on many factors, including: total TPV, current and projected macroeconomic conditions, including unemployment rates, merchant insolvency events, changes to and usage of our customer protection programs, the impact of regulatory changes, and the credit quality of loans receivable arising from transactions funded with our credit products, which include ourPayPal Credit consumer product and merchant loans and advances arising from ourPayPal Working Capital ("PPWC") andPayPal Business Loan ("PPBL") products. We establish allowances for negative customer balances and estimated transaction losses arising from processing customer transactions, such as chargebacks for unauthorized credit card use and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of purchased items, buyer protection program claims, account takeovers, and Automated Clearing House returns. Additions to the allowance, in the form of provisions, are reflected in transaction and credit losses on our consolidated statements of income. The allowances are based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving collection and write-off patterns, and the mix of transaction and loss types, as well as current and projected macroeconomic factors, as appropriate. [[Image Removed: pypl-20201231_g2.jpg]] 49 -------------------------------------------------------------------------------- Table of Contents We also establish an allowance for loans and interest receivable, which represents our estimate of current expected credit losses inherent in our portfolio of loans and interest receivable. This evaluation process is subject to numerous estimates and judgments. The allowance is primarily based on expectations of credit losses based on historical lifetime loss data as well as macroeconomic forecasts applied to the portfolio, which is segmented by factors such as geographic region, delinquency, and vintage. Loss curves are generated using historical loss data for each loan portfolio and are applied to segments of each portfolio, categorized by factors such as geographic region, first borrowing versus reuse, delinquency, credit rating and vintage, which vary by portfolio. We then apply macroeconomic factors such as forecasted trends in unemployment and benchmark credit card charge-off rates, which are sourced externally, using a single scenario that we believe is most appropriate to the economic conditions applicable to a particular period. We utilize externally sourced macroeconomic scenario data to supplement our historical information due to the limited period in which our credit product offerings have been in existence. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our consumer and merchant receivables. We also include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our current expected credit losses. Our consumer receivables are primarily revolving in nature and do not have a contractual term; however, the reasonable and supportable forecast period we have included in our projected loss rates based on externally sourced data is approximately seven years. Our merchant receivables vary in contractual term; however, the reasonable and supportable forecast period we have considered for projected loss rates is approximately 2.5 to 3.5 years, depending upon the product. The allowance for credit losses on interest and fees receivable is determined primarily by applying loss curves to each portfolio by geography, delinquency, and period of origination, among other factors. Determining appropriate current expected credit loss allowances for loans and interest receivable is an inherently uncertain process and ultimate losses may vary from the current estimates. We regularly update our allowance estimates as new facts become known and events occur that may impact the settlement or recovery of losses. The allowances are maintained at a level we deem appropriate to adequately provide for current expected credit losses at the balance sheet date after incorporating the impact of externally sourced macroeconomic forecasts. These forecasts project scenarios such as future unemployment and benchmark credit card charge-off rates. As ofDecember 31, 2020 , we utilized externally published projections of theU.S. andU.K. forecasted unemployment rates and credit card charge-off rates over the reasonable and supportable period, indicating a slight increase in the first half of 2021 followed by a gradual decline and ultimate stabilization of these rates, resulting in an overall principal and interest coverage ratio of approximately 23%. The projected gradual decline in unemployment and credit card charge-off rates is reflective of a prolonged recovery period where we expect to experience elevated charge-off rates. A significant change in the forecasted macroeconomic factors could result in a material change in our allowances. Our allowance as ofDecember 31, 2020 has been adjusted to account for the proactive and reactive measures that we have taken that are intended to reduce financial difficulties experienced by our customers, and other limitations in our expected credit loss models that have arisen due to the extreme fluctuations in both the actual and projected macroeconomic conditions during the period. These qualitative adjustments were also made to incorporate varying degrees of merchant performance both in the current environment as well as expected future performance, and to account for payment holidays granted. Our allowance as ofDecember 31, 2020 has not been adjusted to account for the potential impacts of the CARES Act, which are also intended to help mitigate the negative impact the current pandemic may have on the financial condition of our customers. We are unable to predict the ultimate impact of these actions which may result in adjustments to our allowance for loans and interest receivable in future periods. An increase of 1% in the principal and interest coverage ratio would increase our allowances by approximately$36 million based on the loans and interest receivable balance outstanding as ofDecember 31, 2020 .
ACCOUNTING FOR INCOME TAXES
Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties. We review our tax positions quarterly and adjust the balances as new information becomes available. Our income tax rate is significantly affected by the tax rates that apply to our foreign earnings. In addition to local country tax laws and regulations, our income tax rate depends on the extent that our foreign earnings are taxed by theU.S. through provisions such as the GILTI tax and base erosion anti-abuse tax or as a result of our indefinite reinvestment assertion. Indefinite reinvestment is determined by management's judgment about, and intentions concerning, our future operations. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings, and available tax planning strategies. These sources of income rely heavily on estimates that are based on a number of factors, including our historical experience and short-range and long-range business forecasts. To the extent deferred tax assets are not expected to be realized, we record a valuation allowance. [[Image Removed: pypl-20201231_g2.jpg]] 50
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We recognize and measure uncertain tax positions in accordance withU.S. GAAP, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.U.S. GAAP further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter in which such change occurs. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited by the relevant tax authorities and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes are adequate such that we reflect the benefits more likely than not to be sustained in an examination. We adjust these reserves, as well as the related interest and penalties, where appropriate in light of changing facts and circumstances. Settlement of any particular position could require the use of cash.
Based on our results for the year ended
LOSS CONTINGENCIES
We are currently involved in various claims, regulatory and legal proceedings, and investigations of potential operating violations by regulatory oversight authorities. We regularly review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim, legal proceeding, or potential regulatory violation is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and whether an exposure is reasonably estimable. Our judgments are subjective and are based on the status of the legal or regulatory proceedings, the merits of our defenses, and consultation with in-house and outside legal counsel. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims, litigation, or other violations and may revise our estimates. Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which we operate, our judgments may differ materially from the actual outcomes. REVENUE RECOGNITION Application of the accounting principles inU.S. GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Specifically, the determination of whether we are a principal to a transaction (gross revenue) or an agent (net revenue) can require considerable judgment. Further, we provide incentive payments to consumers and merchants, which require judgment to determine whether the payments should be recorded as a reduction to gross revenue. Changes in judgments with respect to these assumptions and estimates could impact the amount of revenue recognized.
VALUATION OF GOODWILL AND INTANGIBLES
The valuation of assets acquired in a business combination and asset impairment reviews require the use of significant estimates and assumptions. The acquisition method of accounting for business combinations requires us to estimate the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in an acquired business to properly allocate purchase price consideration between assets that are depreciated or amortized and goodwill. Impairment testing for assets, other than goodwill and indefinite-lived intangible assets, requires the allocation of cash flows to those assets or group of assets and, if required, an estimate of fair value for the assets or group of assets. Our estimates are based upon assumptions that we believe to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions, which do not reflect unanticipated events and circumstances that may occur. [[Image Removed: pypl-20201231_g2.jpg]] 51 -------------------------------------------------------------------------------- Table of Contents We evaluate goodwill and intangible assets for impairment on an annual basis, or sooner if indicators of impairment exist. UnderU.S. GAAP, the evaluation of indefinite-lived intangible assets for impairment allows for a qualitative assessment to be performed, which is similar toU.S. GAAP for evaluating goodwill for impairment. In performing these qualitative assessments, we consider relevant events and conditions, including but not limited to: macroeconomic trends, industry and market conditions, overall financial performance, cost factors, company-specific events, legal and regulatory factors, and our market capitalization. If the qualitative assessments indicate that it is more likely than not that the fair value of the reporting unit or indefinite-lived intangible assets are less than their carrying amounts, we must perform a quantitative impairment test. Under the quantitative impairment test, if the carrying amount of the reporting unit goodwill or indefinite-lived intangible asset exceeds the fair value of the respective reporting unit goodwill or indefinite-lived intangible asset, an impairment loss is recorded in the statement of income. Measurement of the fair value of a reporting unit could be based on one or more of the following fair value measures: amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties, present value techniques of estimated future cash flows, valuation techniques based on multiples of earnings or revenue, or a similar performance measure. [[Image Removed: pypl-20201231_g2.jpg]] 52
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