PayPal Holdings (PYPL) 10-K risk factor changes: FY2019 vs FY2018

[removed: The] [added: *The] following discussion is divided into three sections.

The first section, which begins immediately following this paragraph, discusses some of the risks that may adversely affect our business, results of [removed: operations] [added: operations,] and financial condition.

Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our [removed: business.][added: business.* *If any of the following risks actually occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected.*]

[removed: If] [added: An adverse outcome in] any [removed: of the following risks actually occur,] [added: such matters could materially and adversely affect] our business, [removed: financial condition,] results of operations, and [removed: future prospects could be materially and adversely affected.][added: financial condition.]

[removed: Risk] [added: Risk] Factors That May Affect Our Business, Results of Operations, and Financial [removed: Condition][added: Condition]

[removed: We] [added: *We] face substantial and increasingly intense competition worldwide in the global payments [removed: industry.][added: industry.*]

The global payments industry is highly competitive, rapidly changing, highly innovative, and increasingly subject to regulatory [removed: scrutiny.][added: scrutiny and oversight.]

We compete against a wide range of businesses, including [removed: businesses] [added: those] that are larger than we are, have [added: greater name recognition, longer operating histories, or] a [removed: more] dominant [removed: and] [added: or more] secure position, or offer other products and services to consumers and merchants that we do not offer, as well as smaller [added: or younger] companies that may be [removed: able to respond] more [added: agile in responding] quickly to regulatory and technological changes.

Competition [removed: may] also [added: may] intensify as businesses enter into business combinations and [removed: alliances,] [added: partnerships,] and established companies in other segments expand to become competitive with different aspects of our business.

| • | ability to attract, retain, and engage both merchants and consumers [removed: with] [added: on] our [removed: two-sided platform;] [added: Payments Platform;] |

| • | ability to develop products and services across multiple commerce channels, including [removed: mobile payments, credit products,] [added: e-commerce, mobile,] and payments at the [removed: retail] point of sale; |

| • | website, mobile [removed: platform] [added: platform,] and application onboarding, ease-of-use, speed, availability, and dependability; |

| • | ability to assist merchants in complying with payments-related laws and [removed: regulations ;] [added: regulations;] |

| • | providers of [removed: “person-to-person”] [added: person-to-person (“P2P”)] payments that facilitate individuals sending money with an email address or mobile phone number; |

| • | merchants and merchant associations [removed: providing] [added: that may provide] proprietary payment networks to facilitate payments within their own retail network; |

Competition for relationships with these partners is [removed: intense] [added: intense,] and there can be no assurance that we will be able to continue to establish, grow, or maintain these partner relationships.

| • | [removed: service providers] [added: services] that provide online merchants the [removed: ability to offer their customers the] option of paying for purchases from their bank account or paying on credit; |

| • | other [removed: global] online and mobile payment-services [removed: providers;] [added: providers globally;] |

| • | services targeting users of social networks and online gaming, including those offering social commerce and [removed: peer-to-peer] [added: P2P] payments; |

| • | [removed: ecommerce] [added: e-commerce] services that provide special offers linked to a specific payment provider; |

| • | services that help merchants [removed: accept] and [added: consumers use, accept, buy, sell, and] manage virtual currencies; and |

Some of [removed: these] [added: our current and potential] competitors have larger customer bases, [added: broader geographic scope,] volume, scale, resources, and market share than we do, which may provide them significant competitive advantages.

Some [removed: of our] competitors may also be subject to less burdensome licensing, anti-money laundering, counter-terrorist financing, and other regulatory requirements.

They may devote greater resources to the development, promotion, and sale of products and services, and [removed: they may] offer lower prices or more effectively [removed: introduce] [added: offer] their own innovative programs, products, and [removed: services that adversely impact our growth.][added: services.]

If we are not able to differentiate our products and services from those of our competitors, drive value for our customers, or effectively [added: and efficiently] align our resources with our goals and objectives, we may not be able to compete effectively in the market.

[removed: Substantially] [added: *Substantially] all of our net revenues each quarter come primarily from transactions involving payments during that quarter, which may result in significant fluctuations in our operating results that could adversely affect our business, financial condition, results of operations, and cash flows, as well as the trading price of our common [removed: stock.][added: stock.*]

As a result, our operating and financial results have varied on a quarterly basis during our operating [removed: history,] [added: history] and may continue to fluctuate significantly as a result of a variety of factors, including [removed: as a result of] the risks set forth in this “Risk Factors” section.

Due to the inherent difficulty in forecasting revenues, it is also difficult to forecast [removed: expenses as a percentage of net revenues.][added: expenses.]

Quarterly and annual expenses [removed: as a percentage of net revenues] reflected in our financial statements may be significantly different from historical or projected rates.

[removed: Global] [added: *Global] and regional economic conditions could harm our [removed: business.][added: business.*]

| • | consumer debt levels or reduced consumer [removed: confidence.] [added: confidence,] |

| • | changes and uncertainties related to government fiscal and tax policies, [removed: including increased duties, tariffs, or other restrictions,] |

| • | the inability of the U.S. Congress to enact a budget in a fiscal year, [removed: another] [added: a] sequestration, and/or another shutdown of the U.S. government, |

In addition, any financial turmoil affecting the banking system or financial markets could cause additional consolidation of the financial services industry, significant [added: failures of] financial service [removed: institution failures,] [added: institutions,] new or incremental tightening in the credit markets, low liquidity, and extreme volatility or distress in the fixed income, credit, currency, and equity markets, which could have a material adverse impact on our business.

See also the risk factor captioned, [removed: “The] [added: “*The] United Kingdom's departure from the EU could adversely affect [removed: us.”][added: us.*”]

[removed: If] [added: *If] we cannot keep pace with rapid technological developments to provide new and innovative products and services, the use of our products and services and, consequently, our revenues could [removed: decline.][added: decline.*]

[removed: Rapid, significant, and disruptive technological changes impact the industries in which we operate, including developments in] [added: | • |] payment [added: technologies (e.g., real time payments, payment] card tokenization, [removed: cryptocurrencies, mobile, social commerce (i.e., ecommerce through social networks), authentication,] virtual [removed: currencies (including] [added: currencies, including] distributed ledger and blockchain [removed: technologies), and NFC] [added: technologies,] and [removed: other] proximity payment technology, such as [added: NFC and other] contactless [removed: payments.][added: payments); |]

In addition, our ability to adopt new products and services and to develop new technologies may be inhibited by industry-wide standards, [added: platform providers,] payments networks, changes to laws and regulations, [removed: resistance to change from] [added: the extent of changing expectations of] consumers or merchants, third-party intellectual property rights, or other factors.

[removed: Cyberattacks] [added: *Cyberattacks] and security vulnerabilities could result in serious harm to our reputation, business, and financial [removed: condition.][added: condition.*]

Our business involves the collection, storage, processing, and transmission of [added: confidential information and] customers’ personal data, including financial information and information about how they interact with our Payments Platform.

| • | ability of our Payments Platform to support across technologies and payment methods; |

| • | banks and financial institutions providing traditional payment methods, particularly credit and debit cards (collectively, “payment cards”) and electronic bank transfers; |

| • | providers of money remittance services for transferring money abroad, including those that may provide proprietary payment networks; |

| • | changes and uncertainties about U.S and international trade relationships, agreements, policies, treaties and restrictive actions, as well as the possibility of significant increases in tariffs on imported goods, and other restrictive actions, |

Rapid, significant, and disruptive technological changes impact the industries in which we operate, including developments in:

| • | technologies supporting our regulatory and compliance obligations (e.g., in relation to our know your customer (“KYC”) and customer identification program (“CIP”) obligations under anti-money laundering regulations); |

| • | artificial intelligence and machine learning (e.g., in relation to fraud and risk decisioning); |

| • | technologies (e.g., internet browser technology, that enable users to easily store their payment card information for use on any retail or e-commerce website; and |

| • | commerce technologies, including in-store, online, mobile, virtual, and social commerce (i.e., ecommerce through social networks). |

Threats can come from a variety of sources, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, and insider threats.

We also rely on facilities, components, applications, and services supplied by third parties, including data center facilities and cloud storage services, which subjects us to risks in the nature of those discussed in this “Risk Factors” section under the captions “*We rely on third parties in many aspects of our business, which creates additional risk*.” From time to time, such third parties have ceased to provide us with such facilities and services.

The U.K. formally exited the EU on January 31, 2020 and a transition period is in place until December 31, 2020 during which time the U.K. will remain in both the EU customs union and single market and follow EU rules.

- data governance,

- fraud detection,

- antitrust and competition,

Any failure or perceived failure to comply with existing or new laws, regulations, or orders of any government authority (including changes to or expansion of the interpretation of those laws, regulations, or orders), including those discussed in this risk factor, 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.

The Revised Payment Services Directive (“PSD2”) took effect in Europe in 2018, with certain requirements becoming applicable from 2019 or later.

SCA was implemented in 2019.

In line with an opinion issued by the European Banking Authority (“EBA”), national competent authorities (including Luxembourg) have announced enforcement deferral periods for migration to SCA requirements for e-commerce card-based transactions.

PayPal (Europe) has implemented SCA customer processes covering the majority of payment transactions initiated within the EU and has plans to finalize full compliance with SCA; amending or accelerating these plans may adversely impact PayPal’s European customer value proposition.

The Payment Services Act (“PS Act”) passed into law in Singapore in January 2019 and is expected to come into effect in 2020.

Under the PS Act, PayPal Pte.

Ltd. will be required to apply for a license to continue to provide payments services in Singapore.

Furthermore, once the PS Act comes into force and is fully implemented, we may face new regulatory costs and challenges, including the following:

| • | we could be required to comply with new regulatory requirements, resulting in increased 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. |

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”).

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, we completed our acquisition of a 70% equity stake in Guofubao Information Technology Co. (GoPay), Ltd. (“GoPay”), a provider of online payment services in China.

GoPay holds a number of payment business licenses in China and is subject to regulatory supervision by the People’s Bank of China and other regulatory bodies.

The CFPB issued a final rule on prepaid accounts that came into effect on April 1, 2019.

That definition includes certain digital wallets.

In December 2019, we filed a lawsuit in the U.S. District Court for the District of Columbia against the CFPB challenging the validity of the prepaid account rule as applied to PayPal, Inc. As with any litigation, there is no guarantee that our claims will succeed.

Similarly, as a result of Brexit, the U.K. regulators may impose new or different legal requirements on our U.K. business, or require our activities to be conducted locally in the U.K. through a branch office or directly.

Non-compliance with anti-money laundering laws may subject us to significant fines, penalties, lawsuits, and enforcement actions, result in regulatory sanctions and additional compliance requirements, increase regulatory scrutiny of our business, restrict our operations or damage our reputation and brands.

Any failure, or perceived failure, by us to comply with our privacy policies as communicated to users in one or more jurisdictions could result in proceedings or actions against us by data protection authorities, government entities or others, including class action privacy litigation in certain jurisdictions.

Such proceedings or actions could subject us to significant fines, penalties, judgments, and negative publicity which may materially harm our business.

Geopolitical trends, including nationalism, protectionism, and restrictive visa requirements could limit the expansion of our business in those regions.

| • | the technology and payment agnostic nature of our Payments Platform; |

| • | providers of traditional payment methods, particularly credit and debit cards and Automated Clearing House transactions (in particular, well-established banks); |

| • | money remitters; |

In addition, a significant number of our customers authorize us to bill their payment cards or bank accounts directly for all transaction and other fees charged by us.

We also rely on facilities, components, and services supplied by third parties, including data center facilities and cloud storage services.

In March 2017, the U.K. government initiated the exit process under Article 50 of the Treaty on European Union, which commenced a two-year period expiring on March 29, 2019, after which time the U.K. is expected to leave the EU in the absence of any effective extension to the Article 50 period.

The U.K.'s financial service regulators are implementing Temporary Permission Regimes that are expected to be put in place by the U.K.'s government to support European Economic Area (“EEA”) financial services firms in continuing to conduct business in the U.K. should the U.K. exit the EU without an agreement.

et Cie., SCA (“PayPal (Europe)”), our wholly-owned subsidiary that is licensed and subject to regulation as a credit institution in Luxembourg.

The Revised Payment Services Directive (“PSD2”) entered into force in January 2016 and is in the process of being implemented into national legislation, with certain requirements effective January 13, 2018.

However, a number of EU member states have not yet fully implemented PSD2 into domestic legislation.

Luxembourg, which is the home member state of PayPal (Europe), implemented PSD2 on July 28, 2018.

The implementation of PSD2 may negatively affect our business.

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.

Payment services legislation currently pending in Singapore may change how PayPal Pte.

Ltd is regulated and, if such legislation is passed, our compliance and operating costs will likely increase.

In October 2016, the CFPB issued a final rule on prepaid accounts.

In April 2017, the CFPB delayed the effective date of the final rule on prepaid accounts to April 1, 2018, and indicated that it would review, among other issues, the linking of credit cards to digital wallets that are capable of storing funds.

In June 2017, the CFPB released proposed changes to its final rule, and in January 2018, the CFPB issued its final rule, modifying some aspects of the rule, with an overall effective date of April 1, 2019.

We are in the process of implementing certain changes to comply with the final rule.

On April 19, 2018, the European Parliament adopted the European Commission’s proposal for a Fifth Anti-Money Laundering Directive, containing more stringent provisions in certain areas, which may also increase compliance costs.

Any failure, or perceived failure, by us to comply with our privacy policies and 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.

In 2016, the EU adopted the General Data Protection Regulation (“GDPR”), which became effective in May 2018.

The EU data protection regime expands the scope of the EU data protection law to all foreign companies processing personal data of EU residents, imposes a strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide turnover or €20 million, and includes new rights such as the “portability” of personal data.

Although the GDPR applies across the EU without a need for local implementing legislation, each EU member state has the ability to interpret the GDPR opening clauses, which permit region-specific data protection legislation and have the potential to create inconsistencies on a country-by-country basis.

Implementation of the GDPR has required us to change our business practices and increased the costs and complexity of compliance.

PayPal also faces additional potential challenges from local data protection agencies (“DPAs”).

Because PayPal (Europe) is headquartered in Luxembourg and subject to regulation as a bank in that jurisdiction, we have relied on the “one-stop-shop” concept under which Luxembourg has been our lead data protection regulator in the EU.

However, a 2015 European Court of Justice ruling (Weltimmo) affecting companies that do business in the EU potentially could make us subject to the local data protection laws or regulatory enforcement activities of the various EU member states in which we have established legal entities and which apply privacy laws that are different than, and may conflict with, Luxembourg privacy laws.

In addition, because of the large number of text messages, emails, phone calls, and other communications we send or make to our customers for various business purposes, communication-related privacy laws that provide a specified monetary damage award or fine for each violation could result in particularly significant damage awards or fines.

For example, under the Telephone Consumer Protection Act (“TCPA”), in the U.S., plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may triple the damage award for willful or knowing violations.

We have been, and may continue to be subject to lawsuits (including class-action lawsuits) containing allegations that our business violated the TCPA.

These lawsuits seek damages (including statutory damages) and injunctive relief, among other remedies.

Given the large number of communications we send to our customers, a determination that there have been violations of the TCPA or other communications-based statutes could expose us to significant damage awards that could, individually or in the aggregate, materially harm our business.

We may be unable to reach a similar agreement with another partner on favorable terms or at all.

The purchase price is subject to a post-closing true-up and certain other adjustments under the terms of the purchase agreement.

| • | profit repatriation restrictions, foreign currency exchange restrictions, or extreme fluctuations in foreign currency exchange rates for a particular currency; |

| • | different, uncertain, overlapping, or more stringent user protection, data protection, privacy, and other laws and regulations; and |

We have entered into a revolving credit facility and a 364-day delayed-draw term loan credit facility.

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

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

[removed: Business Environment][added: Business Environment]

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

Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products, [removed: compose] [added: comprise] our proprietary Payments Platform.

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

New or changing laws and regulations, including [removed: how such] [added: 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.

Risk [removed: Factors” under the caption—“Cyberattacks] [added: Factors—*Cyberattacks] and security vulnerabilities could result in serious harm to our reputation, [removed: business] [added: business,] and financial [removed: condition.”][added: condition.*”]

The United Kingdom (“U.K.”) held a referendum in June 2016 in which a majority of voters approved an exit from the European Union [removed: (“EU”) (commonly] [added: (“EU”), commonly] referred to as [removed: “Brexit”).][added: “Brexit.” The U.K. formally exited the EU on January 31, 2020 and a transition period is in place until December 31, 2020 during which time the U.K. will remain in both the EU customs union and single market and follow EU rules.]

[removed: Political negotiations are underway; however, there] [added: There] is a significant lack of clarity over the terms of the [removed: U.K.'s exit from the EU and the terms of the U.K.'s] [added: U.K.’s] future relationship with the [removed: EU.][added: EU after that date.]

Risk [removed: Factors” under the caption—“The] [added: Factors—*The] United Kingdom’s departure from the EU could adversely affect [removed: us.”][added: us*.”]

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

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

In [added: 2019,] 2018, [removed: 2017,] and [removed: 2016,] [added: 2017,] net revenues generated from our U.K. operations constituted [removed: 11%,] 11% [removed: and 12%, respectively,] of total net revenues.

In [added: 2019,] 2018, [removed: 2017,] and [removed: 2016,] [added: 2017,] net revenues generated from the EU (excluding the U.K.) constituted less than 20% of total net revenues.

Approximately [removed: 31%] [added: 37%] and [removed: 30%] [added: 31%] of our gross loans and interest receivables as of December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] respectively, were generated from our U.K. operations.

Approximately [removed: 7%] [added: 6%] and [removed: 5%] [added: 7%] of our gross loans and interest receivables as of December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] respectively, were generated from the EU (excluding the [removed: U.K.) operations.][added: U.K.).]

[removed: Overview] [added: Overview] of Results of [removed: Operations][added: Operations]

The following table provides a summary of our consolidated [removed: GAAP] financial [removed: measures] [added: results] for the years ended December 31, [added: 2019,] 2018, [removed: 2017,] and [removed: 2016:][added: 2017:]

| | [removed: Year] [added: Year] Ended December [removed: 31,] [added: 31,] | | | | | | | | | | | | [removed: Percent Increase/(Decrease)] [added: Percent Increase/(Decrease)] | | | | |

| | [removed: 2018] [added: 2019] | | | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2018] [added: 2019] | | | [removed: 2017] [added: 2018] | |

| | [removed: (In] [added: (In] millions, except percentages and per share [removed: amounts)] [added: amounts)] | | | | | | | | | | | | | | | | |

| Net revenues | $ | [removed: 15,451] [added: 17,772] | | | $ | [removed: 13,094] [added: 15,451] | | | $ | [removed: 10,842] [added: 13,094] | | | [removed: 18] [added: 15] | % | | [removed: 21] [added: 18] | % |

| Operating expenses | [removed: 13,257] [added: 15,053] | | | | [removed: 10,967] [added: 13,257] | | | | [removed: 9,256] [added: 10,967] | | | | [removed: 21] [added: 14] | % | | [removed: 18] [added: 21] | % |

| Operating income | [removed: 2,194] [added: 2,719] | | | | [removed: 2,127] [added: 2,194] | | | | [removed: 1,586] [added: 2,127] | | | | [removed: 3] [added: 24] | % | | [removed: 34] [added: 3] | % |

| Operating margin | [removed: 14] [added: 15] | | % | | [removed: 16] [added: 14] | | % | | [removed: 15] [added: 16] | | % | | | | | | |

| Income tax expense | [removed: 319] [added: 539] | | | | [removed: 405] [added: 319] | | | | [removed: 230] [added: 405] | | | | [removed: (21] [added: 69] | [removed: )%] [added: %] | | [removed: 76] [added: (21] | [removed: %] [added: )%] |

| Effective tax rate | [removed: 13] [added: 18] | | % | | [removed: 18] [added: 13] | | % | | [removed: 14] [added: 18] | | % | | | | | | |

| Net income | $ | [removed: 2,057] [added: 2,459] | | | $ | [removed: 1,795] [added: 2,057] | | | $ | [removed: 1,401] [added: 1,795] | | | [removed: 15] [added: 20] | % | | [removed: 28] [added: 15] | % |

| Net income per diluted share | $ | [removed: 1.71] [added: 2.07] | | | $ | [removed: 1.47] [added: 1.71] | | | $ | [removed: 1.15] [added: 1.47] | | | [removed: 16] [added: 21] | % | | [removed: 28] [added: 16] | % |

| Net cash provided by operating activities | $ | [removed: 5,483] [added: 4,561] | | | $ | [removed: 2,531] [added: 5,483] | | | $ | [removed: 3,158] [added: 2,531] | | | [removed: 117] [added: (17] | [removed: %] [added: )%] | | [removed: (20] [added: 117] | [removed: )%] [added: %] |

[removed: The increase was primarily] [added: Net revenues increased $2.3 billion, or 15%, in 2019 as compared to 2018,] driven [added: primarily] by growth in TPV (as defined below under “Net Revenues”) of [removed: 27% in 2018 and 27% in 2017.][added: 23%.]

Net revenues from our acquisitions completed in 2018 [removed: and 2017 collectively] contributed approximately one percentage point to the growth rate in [removed: 2018.][added: 2019.]

[removed: The increase from the impact of acquisitions was] [added: These increases were partially] offset by a decrease in interest and fee income due to the sale of our U.S. consumer credit receivables portfolio to Synchrony Bank [added: (“Synchrony”)] in July 2018, which resulted in a negative impact of approximately four percentage points to the net revenues growth rate in [removed: 2018.][added: 2019.]

Operating expenses related to our acquisitions completed in 2018 [removed: and 2017 collectively] contributed approximately three percentage points to the growth rate in total operating expenses in [removed: 2018.][added: 2019.]

[removed: Our acquisitions] [added: Acquisitions] completed in 2018 [removed: and 2017 collectively] had a negative impact of approximately [removed: seven] [added: five] percentage points to the [removed: 2018] [added: 2019] growth rate in operating income.

Our operating margin was [removed: 14%, 16%, and] 15% [added: and 14%] in [removed: 2018, 2017,] [added: 2019] and [removed: 2016,] [added: 2018,] respectively.

[removed: The increase in net] [added: Net] income [added: increased by $402 million, or 20%,] in [removed: 2018 was attributable] [added: 2019 as compared] to [added: 2018, due to] an increase in operating income of [removed: $67] [added: $525] million and an increase in other income (expense), net of [removed: $109] [added: $97] million, [removed: which was] driven [added: primarily] by [added: net] unrealized gains on [removed: equity investments and an increase in interest income,] [added: strategic investments,] partially offset by an increase in [removed: interest expense.][added: income tax expense of $220 million.]

[removed: Impact] [added: Impact] of Foreign Currency Exchange [removed: Rates][added: 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 [added: exchange] risk which may adversely impact our financial results.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations focuses on discussion of 2019 results as compared to 2018 results.

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

| Other income (expense), net | 279 | | | | 182 | | | | 73 | | | | 53 | % | | 149 | % |

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

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

Operating margin in 2019 was positively impacted by a reduction in restructuring and other charges driven primarily by the completion of the sale of our U.S. consumer credit receivables portfolio in July 2018, subsequent to which we no longer record adjustments to the cost basis of loans and interest receivables held for sale, offset by a negative impact of growth in our transaction expense, which increased 22% in 2019, compared to a 15% increase in net revenues in the same period.

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

| | 2019 | | | | 2018 | | |

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

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

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

| | Year Ended December 31, | | | | | | | | | | | | Percent Increase/ (Decrease) | | | | |

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

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

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

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

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

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

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

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

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

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

| | Year Ended December 31, | | | | | | | | | | | | Percent Increase/ (Decrease) | | | | |

| Technology and development(1) | 2,085 | | | | 1,831 | | | | 1,740 | | | | 14 | % | | 5 | % |

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

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

| | Year Ended December 31, | | | | | | | | | | | | Percent Increase/(Decrease) | | | | |

| | (In millions, except percentages) | | | | | | | | | | | | | | | | |

Transaction losses increased by $33 million, or 3%, in 2019 compared to 2018, due to growth in TPV, partially offset by benefits realized through improvements in risk management capabilities, which also contributed to a decrease in our transaction loss rate over the same period.

Loan losses increased by $73 million, or 34%, in 2019 compared to 2018, due primarily to growth in our merchant loans and advances and international consumer loans receivable balances, partially offset by the recognition of losses in 2018 associated with U.S. consumer credit receivable balances that were not subject to the sale agreement with Synchrony.

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

| | 2019 | | | 2018 | |

| | December 31, | | | | |

| | 2019 | | | 2018(1) | |

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

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

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

*Technology and development*

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

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

In March 2017, the U.K. government initiated the exit process under Article 50 of the Treaty on European Union, which commenced a two-year period expiring on March 29, 2019, after which time the U.K. is expected to leave the EU in the absence of any effective extension to the Article 50 period.

The U.K.'s financial service regulators are implementing Temporary Permission Regimes (“TPR”) that are expected to be put in place by the U.K.'s government 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 are expected to be published in the first quarter of 2019 and will come into effect when the U.K. leaves the EU.

Accordingly, we may need to adjust our business to comply with additional legal and regulatory requirements if accessing the TPR.

| | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

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

Net revenues increased $2.4 billion, or 18%, in 2018 and $2.3 billion, or 21%, in 2017.

In 2017, net revenues from our acquisitions of TIO and Swift were not material.

Total operating expenses increased $2.3 billion, or 21%, in 2018 and $1.7 billion, or 18%, in 2017.

The increase in 2018 was due primarily to an increase in transaction expense, general and administrative, transaction and loan loss, sales and marketing, and restructuring and other expenses.

In March 2018, management decided to wind down TIO's operations.

The increase in total operating expense in 2017 was due primarily to an increase in transaction expense, sales and marketing, general and administrative, product development, and restructuring and other charges.

Operating expenses related to TIO and Swift collectively contributed one percentage point to the 2017 growth rate.

Operating income increased $67 million, or 3%, in 2018 and increased $541 million, or 34% in 2017.

Operating income increased in 2018 and 2017 due primarily to the increase in net revenues, offset by the growth in operating expenses.

Our acquisitions in 2017 collectively had a negative impact of four percentage points on our 2017 growth rate in operating income.

Operating margin in 2018 was negatively impacted by growth in our transaction expense, which increased 26% in 2018, compared to net revenues, which increased 18% in the same period, as well as the negative impact of acquisitions.

These impacts in 2018 were partially offset by operating efficiencies in our business.

Operating margin in 2017 was negatively impacted by growth in our transaction expense, which increased 32% in 2017, compared to net revenues, which increased 21% in the same period, as well as restructuring expense of $40 million incurred in 2017.

These impacts in 2017 were offset by operating efficiencies in our business, and a one-time benefit of $322 million pertaining to reversal of allowances related to loans and interest receivables due to the designation as held for sale of our U.S. consumer credit portfolio in November 2017.

Net income increased by $262 million, or 15%, in 2018 and $394 million, or 28%, in 2017.

The increase in net income was further impacted by a decrease in income tax expense of $86 million, primarily driven by a reduction in net tax expense recognized with respect to the Tax Act, partially offset by an increase in tax expense due to the increase in operating income and other income (expense), net.

The increase in net income in 2017 was attributable to an increase in operating income of $541 million and an increase in other income (expense), net of $28 million, partially offset by an increase in income tax expense of $175 million.

Non-GAAP financial measures

The following table provides a summary of our consolidated non-GAAP financial measures for the years ended December 31, 2018, 2017, and 2016:

| Non-GAAP net revenues | $ | 15,451 | | | $ | 13,055 | | | $ | 10,842 | | | 18 | % | | 20 | % |

| Non-GAAP operating income | $ | 3,349 | | | $ | 2,755 | | | $ | 2,174 | | | 22 | % | | 27 | % |

| Non-GAAP operating margin | 22 | | % | | 21 | | % | | 20 | | % | | | | | | |

| Non-GAAP income tax expense | $ | 618 | | | $ | 510 | | | $ | 394 | | | 21 | % | | 29 | % |

| Non-GAAP net income | $ | 2,913 | | | $ | 2,318 | | | $ | 1,825 | | | 26 | % | | 27 | % |

| Non-GAAP net income per diluted share | $ | 2.42 | | | $ | 1.90 | | | $ | 1.50 | | | 28 | % | | 27 | % |

| Free Cash Flow(1) | $ | 4,660 | | | $ | 1,864 | | | $ | 2,489 | | | 150 | % | | (25 | )% |

(1) The year ended December 31, 2018 includes a positive impact of approximately $1.4 billion due to the completion of the sale of our US consumer credit receivables portfolio in July 2018.

The year ended December 31, 2017 includes a negative impact of approximately $1.3 billion due to the change in presentation of the U.S. consumer credit receivables portfolio subsequent to its designation as held for sale in November 2017.

Non-GAAP net revenues, non-GAAP operating income, non-GAAP operating margin, non-GAAP income tax expense, non-GAAP net income, non-GAAP net income per diluted share, and free cash flow are not financial measures prepared in accordance with generally accepted accounting principles (“GAAP”).

For information on how we compute these non-GAAP financial measures and a reconciliation to the most directly comparable financial measures prepared in accordance with GAAP, please refer to “Non-GAAP Financial Information” below.

Due to the diversification of PayPal’s business through strategic partnerships, new products, and acquisitions, in the first quarter of 2018, we updated our definitions of “active accounts” and “total payment volume (TPV)” as described below.

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 [added: equity] investment risk.

[removed: Interest] [added: *Interest] Rate [removed: Risk][added: Risk*]

As of December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] approximately [removed: 78%] [added: 63%] and [removed: 39%,] [added: 78%,] respectively, of our total cash, cash equivalents, and investment portfolio [added: (excluding restricted cash and strategic investments)] was held in cash and cash equivalents.

We seek to preserve principal while holding eligible liquid assets, as defined by applicable regulatory requirements and commercial law in [removed: the] [added: certain] jurisdictions where we operate, equal to at least 100% of the aggregate amount of all customer balances.

Borrowings under [removed: the Amended Credit Agreement and 2015 Credit Agreement,] [added: these facilities,] if any, bear interest at floating rates.

As a result, we are exposed to [added: the risk related to] fluctuations in interest [removed: rates] [added: rate] to the extent of our borrowings.

As of December 31, 2018, we had $2.0 billion of borrowings outstanding [removed: under the Amended Credit Agreement] at a weighted average interest rate of 3.34%.

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 [removed: allowance] [added: allowances] for [removed: loan] [added: 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 December 31, [removed: 2018] [added: 2019] and [removed: 2017.][added: 2018.]

[removed: Foreign] [added: *Foreign] Currency Exchange Rate [removed: Risk][added: 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 [removed: risk] [added: risk,] which may adversely impact our financial results.

Our cash flows, results of operations, and certain of our intercompany balances that are exposed to foreign [added: 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.

[removed: These foreign currency exchange contracts are accounted for as derivative instruments; for] [added: For] additional details related to our foreign currency exchange contracts, please see “Note 10—Derivative Instruments” to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We use foreign currency exchange forward contracts to protect our forecasted U.S. dollar-equivalent earnings [added: 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 [added: foreign] currency exchange rate movements.

We designate these contracts as cash flow [added: and net investment] hedges for accounting purposes.

[removed: The derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (“AOCI”) and] [added: 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.

We considered the historical trends in [added: foreign] currency exchange rates and determined that it was reasonably possible that changes in exchange rates of 20% for all currencies could be experienced in the near term.

If the U.S. dollar weakened by 20% at December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] the amount recorded in AOCI related to our foreign currency exchange forward contracts, before taxes, would have been approximately [removed: $707] [added: $900] million and [removed: $536] [added: $707] million lower, respectively.

If the U.S. dollar strengthened by 20% at December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] the amount recorded in AOCI related to our foreign currency exchange forward contracts, before taxes, would have been approximately [removed: $707] [added: $900] million and [removed: $536] [added: $707] million higher, respectively.

Adverse changes in exchange rates of 20% for all currencies would have resulted in an adverse impact on income before income taxes of approximately [removed: $295] [added: $147] million and [removed: $243] [added: $295] million at December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] respectively, without considering the offsetting effect of hedging.

Foreign currency exchange contracts in place as of December 31, [removed: 2017] [added: 2019] would have positively impacted income before income taxes by approximately [removed: $211] [added: $153] million, resulting in a net [removed: negative] [added: positive] impact of approximately [removed: $32] [added: $6] million.

[added: *Equity] Investment [removed: Risk][added: Risk*]

As of December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] our [removed: equity] [added: strategic] investments totaled [removed: $293 million] [added: $1.8 billion] and [removed: $88] [added: $293] million, respectively, which represented approximately [removed: 3%] [added: 13%] and [removed: 1%] [added: 3%] of our total [added: cash,] cash [added: equivalents,] and investment portfolio at those [removed: dates, respectively, and were related to minority equity interests in companies that are not publicly traded.][added: respective dates.]

We review our [added: non-marketable equity] investments [added: accounted] for [added: 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 [removed: sales] [added: purchases] and [removed: acquisitions] [added: sales] of [removed: the securities in which we have invested,] [added: securities,] and other publicly available data.

We have $5.0 billion in fixed rate debt with varying maturity dates.

Since these notes bear interest at fixed rates, they do not result in any financial statement risk associated with changes in interest rates.

However, the fair value of these notes fluctuates when interest rates change.

We also have various committed credit facilities available to us aggregating to approximately $6.1 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.

As of December 31, 2019, we had no amounts outstanding under these credit facilities.

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

These foreign currency exchange contracts are accounted for as derivative instruments.

The derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (“AOCI”).

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.

Our strategic investments are subject to a variety of market-related risks that could substantially reduce or increase the carrying value of the portfolio.

Our strategic investments include marketable equity securities, which are publicly traded, and non-marketable equity securities, which are investments in privately held companies that are not publicly traded.

We are required to record all adjustments to the carrying value of these strategic investments through our consolidated statements of income.

As such, we anticipate volatility to our net income in future periods due to changes in fair value related to our investments in marketable equity securities and changes in observable prices related to our non-marketable equity securities accounted for under the Measurement Alternative.

These changes could be material based on market conditions.

A hypothetical adverse change 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 $184 million to the carrying value of the portfolio.

In the fourth quarter of 2017, we entered into an unsecured $3.0 billion, 364 day delayed-draw term loan credit facility, which was available in up to three borrowings (“2017 Credit Agreement”).

In the fourth quarter of 2018, we entered into an amended and restated credit agreement (“Amended Credit Agreement”), which provides for an unsecured $5.0 billion, 364\-day delayed-draw term loan credit facility, which is available in up to four separate borrowings.

In the third quarter of 2015, we entered into a $2.0 billion senior unsecured credit facility maturing in 2020 (“2015 Credit Agreement”).

We also maintain uncommitted credit facilities in various regions throughout the world with borrowing capacity of approximately $300 million in the aggregate.

Accordingly, at December 31, 2018, $3.0 billion of borrowing capacity was available for the purposes permitted by the Amended Credit Agreement, subject to customary conditions to borrowing.

As of December 31, 2018, no borrowings or letters of credit were outstanding under the 2015 Credit Agreement or our uncommitted credit facilities.

If we elect to discontinue our cash flow hedges and it is probable that the original forecasted transaction will occur, we continue to report them in AOCI until the forecasted transaction affects earnings at which point we also reclassify the de-designated hedges 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.

As of December 31, 2018 and 2017, we did not hold any marketable equity instruments.

[removed: Overview][added: Overview]

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

Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, [removed: Xoom] [added: Xoom,] and iZettle [removed: products, compose] [added: products and services, comprise] our proprietary Payments Platform.

PayPal’s [removed: service enables] [added: payment solutions enable] our customers to send and receive payments.

[removed: Since] PayPal [removed: serves as a proprietary payment method that] is [removed: accepted by merchants, we are] more than a connection to third-party payment networks.

[removed: Our service enables] [added: We provide proprietary payment solutions accepted by merchants that enable] the completion of payments on our Payments Platform on behalf of our customers.

We offer our customers the flexibility to use their accounts to purchase and receive payment for goods and services, as well as [added: the ability] to transfer and withdraw funds.

We enable consumers to exchange funds more safely with merchants using a variety of funding sources, which may include a bank account, a PayPal account balance, a [added: Venmo account balance, a] PayPal Credit account, a credit or debit card, or other stored value products such as [removed: coupons and] [added: coupons,] gift [removed: cards.][added: cards, and eligible credit card rewards.]

Our PayPal, [removed: Venmo] [added: Venmo,] and Xoom products also make it safer and simpler for friends and family to transfer funds to each other.

[removed: Generally,] [added: Generally] we do not charge consumers to fund or draw from their accounts; however, we generate revenue from consumers on fees charged for foreign currency [removed: exchange.][added: exchange, and instant transfers from their PayPal or Venmo account to their debit card or bank account, as well as from interest and fees from our PayPal Credit product.]

We also earn revenue by providing other value added [removed: services] [added: services,] which comprise revenue earned through partnerships, our PayPal [removed: Credit] [added: merchant and consumer credit] products, subscription fees, gateway services, and other services that we provide to our merchants and consumers.

Our gateway services, which include our Payflow Gateway [removed: services] [added: service] and Braintree Gateway [removed: services,] [added: service,] provide the technology that links a merchant’s website to its processing network and merchant account and enables merchants to accept payments online with credit or debit cards.

[removed: Strategy][added: Strategy]

Our ability to grow revenue is affected by, among other things, consumer spending patterns, merchant and consumer adoption of digital payment methods, the expansion of multiple commerce channels, the growth of mobile devices and merchant and consumer applications on those devices, the growth of consumers globally with internet and mobile access, the pace of transition from cash and checks to digital forms of payment, our share of the digital payments market, and our ability to innovate and [removed: bring] [added: introduce] new products and services that merchants and consumers value.

| • | [removed: Growing] [added: *Growing] our core [removed: business:] [added: business*:] through expanding our global capabilities, customer base and scale, increasing our [removed: customers'] [added: customers’] use of our products and services by better addressing their everyday needs related to accessing, [removed: managing] [added: managing,] and moving money, and expanding the adoption of our solutions by [removed: new] merchants and consumers; |

| • | [removed: Extending through] [added: *Forming] strategic [removed: partnerships:] [added: partnerships*:] by building new strategic partnerships to provide better experiences for our customers, offering greater choice and flexibility, acquiring new customers, and reinforcing our role in the ecosystem; and |

| • | [removed: Seeking] [added: *Seeking] new areas of [removed: growth:] [added: growth*:] organically and through acquisitions [added: and strategic investments] in our existing and new international markets around the world and focusing on innovation both in the digital and physical world. |

[removed: Key] [added: Key] Performance [removed: Metrics][added: Metrics]

[removed: ][added: ]

We measure the relevance of our products and services to our customers, and therefore the success of our business, through active accounts, payment transactions, and [added: total] payment volume:

[removed: Active Accounts:] [added: *Active Accounts*:] 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.

A platform access partner is a [removed: third party] [added: third-party] whose customers are provided access to [removed: PayPal's] [added: PayPal’s] Payments Platform through such [removed: third party's] [added: third-party’s] login credentials.

A market is a geographic area or political jurisdiction, such as a country, territory, or protectorate, in which we offer some or all of our [added: products and] services.

[removed: Number] [added: *Number] of Payment [removed: Transactions:] [added: Transactions*:] Number of payment transactions is 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.

[removed: Total] [added: *Total] Payment Volume [removed: (“TPV”):] [added: (“TPV”)*:] 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.

[removed: Our Strengths][added: Our Strengths]

| • | [removed: Two-sided Platform—our] [added: *Two-sided Platform—*our] platform connecting merchants and consumers enables PayPal to offer unique end-to-end product experiences while gaining valuable insights into customer behavior through our data. Our platform provides for [removed: simple digital] [added: digital, mobile,] and [removed: mobile] [added: in-store] transactions while being both technology and platform agnostic. |

| • | [removed: Scale—our] [added: *Scale—*our] global scale allows us to drive organic growth. As of December 31, [removed: 2018,] [added: 2019,] we had [removed: 267] [added: 305] million active accounts, [removed: which included 21] [added: consisting of 281] million [added: consumer] active [added: accounts and 24 million] merchant [removed: accounts. In 2018, we processed $578 billion of TPV] [added: active accounts] in more than 200 markets around the world. [added: In 2019, we processed $712 billion of TPV.] |

| • | [removed: Brands—we] [added: *Brands—*we] have built well-recognized and trusted brands. Our marketing efforts [added: across multiple demographic groups] play an important role in building brand visibility, usage, and overall preference among customers. |

| • | [removed: Risk Management—our] [added: *Risk Management—*our] risk management system and [added: use of] tokenization [removed: usage] are designed to help keep [removed: our customers safe] [added: customer information secure,] and to help ensure we process legitimate transactions around the world, while identifying and [removed: reducing] [added: minimizing] illegal, high-risk, or fraudulent transactions. |

| • | [removed: Regulatory—we] [added: *Regulatory—*we] believe that our regulatory licenses, which enable us to operate in markets around the world, are a distinct advantage and [added: help] support business growth. |

[removed: Technology][added: Technology]

Our Payments Platform utilizes a combination of proprietary and third-party technologies and services [added: intended] to efficiently and securely facilitate transactions between millions of merchants and consumers worldwide across different channels, [removed: markets] [added: markets,] and networks.

Consumers who use our Payments Platform can send payments in more than 200 markets [removed: across] [added: around] the [removed: globe] [added: world] and in more than 100 currencies, withdraw funds to their bank accounts in 56 currencies and hold balances in their PayPal accounts in 25 currencies.

We have developed intuitive user interfaces, customer tools, [removed: and] transaction completion [removed: database] [added: database,] and network applications on our Payments Platform that help our customers utilize our suite of products and services.

The technology infrastructure supporting our Payments Platform simplifies the storage and processing of large amounts of data and facilitates the deployment and operation of large-scale global products and [removed: services.][added: services in both our own data centers and cloud computing.]

Our technology infrastructure is designed around [removed: industry-standard architectures] [added: industry best practices] intended to reduce downtime in the event of outages or catastrophic occurrences.

Our Payments Platform incorporates multiple layers of protection for [added: business] continuity and system redundancy purposes and to help address cybersecurity [removed: challenges.][added: risks.]

We have a comprehensive cybersecurity program designed to protect our technology infrastructure and Payments Platform against these challenges, including regularly testing our systems to [added: identify and] address potential vulnerabilities.

[removed: Merchant] [added: Merchant] and Consumer Payment [removed: Solutions][added: Solutions]

We operate a global, two-sided network at scale that connects merchants and consumers with 305 million active accounts (consisting of 281 million consumer active accounts and 24 million merchant active accounts) across more than 200 markets.

PayPal helps merchants and consumers connect, transact, and complete payments, whether they are online, on a mobile device, in an app, or in person.

| • | *Expanding our value proposition for merchants and consumers*: by being technology and platform agnostic, partnering with our merchants to grow and expand their business online and in-store; and providing consumers with simple, secure, and flexible ways to manage and move money across different markets, merchants, and platforms; |


*Merchant Value Proposition*

We partner with our merchants to help grow and expand their businesses by providing global reach and powering all aspects of digital checkout.

We offer alternative payment methods, including access to credit solutions, provide fraud prevention and risk management solutions, reducing losses through proprietary protection programs, and offer tools and insights for leveraging data analytics to attract new customers and improve sales conversion.

We employ a technology and platform agnostic approach intended to enable merchants of all sizes to provide digital checkout online, on mobile, and in-store (at the point of sale) across all platforms and devices and to securely and simply receive payments from their customers.

iZettle provides in-store capabilities in twelve countries.

During 2019, we launched PayPal for Marketplaces, our global, end-to-end solution designed to satisfy the unique payment needs of platforms, marketplaces, and crowdfunding sites, which provides payment solutions for accepting and disbursing funds between consumers and businesses.

Our acquisition of a controlling equity interest in Guofubao Information Technology Co. (GoPay), Ltd (“GoPay”), a holder of payment business licenses in China, enables us to partner with Chinese financial institutions and technology platforms to provide a more comprehensive set of payment solutions to merchants and consumers, both in China and globally.

*Consumer Value Proposition*

We provide consumers with a digital wallet which enables them to send payments to merchants more safely using a variety of funding sources, which may include a bank account, a PayPal account balance, a Venmo account balance, a PayPal Credit account, a credit or debit card, or other stored value products such as coupons, gift cards, and eligible credit card rewards.

Our U.S. PayPal branded consumer credit program is offered exclusively through Synchrony Bank.

Many of the areas in which we compete evolve rapidly with changing and disruptive technologies, shifting user needs, and frequent introductions of new products and services.

Competition also may intensify as businesses enter into business combinations and partnerships, and established companies in other segments expand to become competitive with different aspects of our business.

| • | ability of our Payments Platform to support across technologies and payment methods; |

For example, the EU adopted a comprehensive General Data Protection Regulation (the “GDPR”), which came into effect in May 2018.

GDPR expanded the scope of the EU data protection law to foreign companies processing personal data of European Economic Area (“EEA”) individuals and imposed a stricter data protection compliance regime.

In Europe, the operations of our Luxembourg bank are subject to confidentiality and information safeguarding requirements under the Luxembourg Banking Act.

We operate a two-sided network where both merchants and consumers have PayPal accounts with stored balance functionality.

| • | Expanding our value proposition for customers: by focusing on trust and simplicity, providing risk management and insights from our two-sided Payments Platform, and being technology and platform agnostic; |

As of December 31, 2018, we had approximately 267 million active accounts across more than 200 markets.

Our combined payment solution capabilities offer our merchants and consumers a broad range of products and services, enabling our merchants to securely and simply receive payments from their customers while allowing our consumers to make seamless transactions across different markets and networks.

We partner with our merchants to help grow and expand their businesses by improving sales conversion; providing global reach, offering alternative payment methods; reducing losses through proprietary protection programs, providing fraud prevention and risk management solutions; and leveraging data analytics.

We do not charge merchants setup or recurring fees for our standard service.

Our gateway services provide the payment gateway technology that links a merchant’s website to its processing network and enable merchants to accept payments online with credit and debit cards.

We believe that our recent acquisition of iZettle in September 2018 will enable us to further 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.

iZettle provides in-store capabilities in eleven countries, as well as near-term, in-store expansion opportunities into other existing PayPal markets.

We are responsible for servicing functions related to all of our credit products.

In the U.S., credit originating from our PayPal Working Capital and PayPal Business Loan products is currently extended through third-party financial institutions from whom we purchase the related receivables.

For our consumer and merchant credit products outside the U.S., we extend credit through certain international PayPal subsidiaries.

During the fourth quarter of 2017, we expanded our strategic consumer credit relationship with Synchrony Financial and agreed to sell our U.S. consumer credit receivables portfolio to Synchrony Bank.

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

We compete against all forms of payments, including credit and debit cards; automated clearing house and bank transfers; other online payment services; mobile payments; and offline payment methods, including cash and check.

| • | the technology and payment agnostic nature of our Payments Platform; |

We pursue the registration of our domain names, trademarks, and service marks in the U.S. and internationally.

Payments Regulation.

Anti-Money Laundering and Counter-Terrorist Financing.

Interchange Fees.

Data Protection and Information Security.

For example, the EU adopted a comprehensive General Data Protection Regulation (the “GDPR”), which came into effect in May 2018, as supplemented by any national laws (such as in the U.K., the Data Protection Act 2018) and further implemented through binding guidance from the European Data Protection Board,and expanded the scope of the EU data protection law to foreign companies processing personal data of European Economic Area (“EEA”) individuals, imposed a stricter data protection compliance regime, and included new data subject rights (e.g., the right to erasure, commonly known as the “right to be forgotten”).

Anti-Corruption.

Additional Regulatory Developments.

[removed: UNITED STATES][added: UNITED STATES]

[removed: SECURITIES] [added: SECURITIES] AND EXCHANGE [removed: COMMISSION][added: COMMISSION]

[removed: Washington,] [added: Washington,] D.C. [removed: 20549][added: 20549]

[removed: FORM 10-K][added: FORM 10-K]

| [removed: ý] [added: ☒] | [removed: ANNUAL] [added: ANNUAL] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

[removed: For] [added: For] the fiscal year [removed: ended December] [added: ended December] 31, [removed: 2018.][added: 2019.]

| [removed: o] [added: ☐] | [removed: TRANSITION] [added: TRANSITION] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

[removed: For] [added: For] the Transition Period from to [removed: .][added: .]

[removed: Commission] [added: Commission] file [removed: number 001-36859][added: number 001-36859]

[removed: PayPal] [added: PayPal] Holdings, [removed: Inc.][added: Inc.]

[removed: (Exact] [added: (Exact] Name of Registrant as Specified in Its [removed: Charter)][added: Charter)]

| [removed: Delaware] [added: Delaware] | [removed: 47-2989869] | [added: | 47-2989869 |]

| [removed: (State] [added: (State] or Other Jurisdiction [removed: of Incorporation] [added: of Incorporation] or [removed: Organization)] [added: Organization)] | [removed: (I.R.S. Employer Identification No.)] | [added: | (I.R.S. Employer Identification No.) |]

| [removed: 2211] [added: 2211] North First [removed: Street San Jose, California] [added: Street] | [removed: 95131] [added: San Jose,] | [added: California | 95131 |]

| [removed: (Address] [added: (Address] of Principal Executive [removed: Offices)] [added: Offices)] | [removed: (Zip Code)] | [added: | (Zip Code) |]

[removed: (408) 967-1000][added: (408) 967-1000]

[removed: (Registrant’s] [added: (Registrant’s] telephone number, including area [removed: code)][added: code)]

[removed: Securities] [added: Securities] registered pursuant to Section 12(b) of the [removed: Act:][added: Act:]

| [removed: Title] [added: *Title] of each [removed: class] [added: class*] | [removed: Name] [added: *Trading Symbol(s)* | *Name] of each exchange on which [removed: registered] [added: registered*] |

| [removed: Common Stock,] [added: Common stock,] $0.0001 par value per [removed: share] [added: share] | [removed: The NASDAQ Stock Market LLC] [added: PYPL] | [added: NASDAQ Global Select Market |]

[removed: Securities] [added: Securities] registered pursuant to Section 12(g) of the Securities Exchange Act of [removed: 1934:][added: 1934:]

[removed: None][added: None]

Yes [removed: \[x\]] [added: ☒] No [removed: \[ \]][added: ☐]

Yes [removed: \[ \]] [added: ☐] No [removed: \[x\]][added: ☒]

| Large [removed: accelerated filer] [added: Accelerated Filer] | [removed: ý] [added: ☒] | Accelerated [removed: filer] [added: Filer] | [removed: o] [added: ☐] |

| Non-accelerated [removed: filer] [added: Filer] | [removed: o] [added: ☐] | Smaller reporting company | [removed: o] [added: ☐] |

| | | Emerging growth company | [removed: o] [added: ☐] |

| 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. [removed: o] [added: ☐] | | | |

As of June [removed: 30, 2018,] [added: 28, 2019,] the aggregate market value of the [removed: registrant's] [added: registrant’s] common stock held by non-affiliates of the registrant was approximately [removed: $98.5] [added: $134.5] billion based on the closing sale price as reported on the NASDAQ Global Select Market.

As of January 31, [removed: 2019,] [added: 2020,] there were [removed: 1,173,209,367] [added: 1,172,955,485] shares of common stock outstanding.

[removed: DOCUMENTS] [added: DOCUMENTS] INCORPORATED BY [removed: REFERENCE][added: REFERENCE]

Portions of the registrant’s definitive proxy statement for its [removed: 2019] [added: 2020] Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein.

Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, [removed: 2018.][added: 2019.]

[removed: TABLE] [added: TABLE] OF [removed: CONTENTS][added: CONTENTS]

| | | [removed: Page] [added: Page] |

| [removed: Part I] [added: Part I] | | |

| Item 1. | [removed: [Business](#s8F8469F94DBC5CFC837041177F4FE095)] [added: [Business](#sF1BB3293FE725F579AA9CBFF5186D00B)] | [removed: [4](#s8F8469F94DBC5CFC837041177F4FE095)] [added: [4](#sF1BB3293FE725F579AA9CBFF5186D00B)] |

| Item 1A. | [Risk [removed: Factors](#sE847AF6121E1505487574B26F3EA6050)] [added: Factors](#s266F01DAB4ED5E6C9773ED99ABFB80EE)] | [removed: [11](#sE847AF6121E1505487574B26F3EA6050)] [added: [12](#s266F01DAB4ED5E6C9773ED99ABFB80EE)] |

| Item 1B. | [Unresolved Staff [removed: Comments](#sB6429203BE9A520DA4482ECF81CF54CF)] [added: Comments](#sB1EC6FFD760F5F2D9930731F4D41CFEA)] | [removed: [36](#sB6429203BE9A520DA4482ECF81CF54CF)] [added: [37](#sB1EC6FFD760F5F2D9930731F4D41CFEA)] |

| Item 2. | [removed: [Properties](#s0DCD333C55CD59E8878F84A5BF4C64D4)] [added: [Properties](#s441127BF8B1B594D9AB07865AFEC9CE0)] | [removed: [36](#s0DCD333C55CD59E8878F84A5BF4C64D4)] [added: [37](#s441127BF8B1B594D9AB07865AFEC9CE0)] |

OR

Yes ☒ No ☐

Yes ☒ No ☐

| --- | --- | --- | --- |

| | | | |

| | | | |

Yes ☐ No ☒

| | | |

| --- | --- | --- |

| | | |

10-K 1 pypl201810-k.htm 10-K

| | |

| --- | --- |

OR

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

\[x\]

We use the properties for executive and administrative offices, data centers, product development offices, and customer [removed: service offices.][added: services and operations centers.]

As of December 31, [removed: 2018,] [added: 2019,] our owned and leased properties provided us with aggregate square footage as follows:

| | [removed: United States] [added: United States] | | | [removed: Other Countries] [added: Other Countries] | | | [removed: Total] [added: Total] | |

| | [removed: (In millions)] [added: (In millions)] | | | | | | | |

| Owned facilities | [removed: 1.1] [added: 1.2] | | | 0.2 | | | [removed: 1.3] [added: 1.4] | |

| Leased facilities | 1.2 | | | [removed: 1.9] [added: 1.8] | | | [removed: 3.1] [added: 3.0] | |

| Total facilities | [removed: 2.3] [added: 2.4] | | | [removed: 2.1] [added: 2.0] | | | 4.4 | |

We own a total of approximately [removed: 106] [added: 113] acres of land, with approximately [removed: 85] [added: 92] acres in the U.S. Our corporate headquarters are located in San Jose, California and occupy approximately 0.7 million of owned square feet.

[removed: PART II][added: PART II]

[removed: Common Stock][added: Common Stock]

PayPal common stock is quoted on the NASDAQ [removed: Stock] [added: Global Select] Market under the ticker symbol “PYPL.”

As of January 31, [removed: 2019,] [added: 2020,] there were [removed: approximately 3,824] [added: 3,553] holders of record of our common stock.

[removed: Dividend Policy][added: Dividend Policy]

[removed: Stock] [added: Stock] Repurchase [removed: Activity][added: Activity]

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 [removed: cash from operations] [added: working capital] or other financing alternatives.

We may terminate our stock repurchase programs at any time without [added: prior] notice.

The stock repurchase activity under our stock repurchase programs during the three months ended December 31, [removed: 2018] [added: 2019] is summarized as follows:

| | [removed: Total] [added: Total] number of shares [removed: purchased] [added: purchased] | | | [removed: Average] [added: Average] price paid per [removed: share(1)] [added: share(1)] | | | | [removed: Total] [added: Total] number of shares purchased as part of publicly announced plans or [removed: programs] [added: programs] | | | [removed: Approximate] [added: Approximate] dollar value of shares that may yet be purchased under the plans or [removed: programs] [added: programs] | | |

| | [removed: (In] [added: (In] millions, except per share [removed: amounts)] [added: amounts)] | | | | | | | | | | | | |

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

No activity has occurred to date under the July 2018 [added: stock] repurchase program.

| October 1, 2019 through October 31, 2019 | — | | | $ | — | | | — | | | $ | 10,374 | |

| November 1, 2019 through November 30, 2019 | — | | | $ | — | | | — | | | 10,374 | | |

| December 1, 2019 through December 31, 2019 | 2.9 | | | $ | 105.21 | | | 2.9 | | | 10,068 | | |

| | 2.9 | | | | | | | 2.9 | | | $ | 10,068 | |

This program became effective in December 2017 upon completion of a previous stock repurchase program.

| October 1, 2018 through October 31, 2018 | — | | | $ | — | | | — | | | $ | 12,074 | |

| November 1, 2018 through November 30, 2018 | 1.1 | | | $ | 84.21 | | | 1.1 | | | 11,980 | | |

| December 1, 2018 through December 31, 2018 | 6.0 | | | $ | 84.18 | | | 6.0 | | | 11,474 | | |

| | 7.1 | | | | | | | 7.1 | | | $ | 11,474 | |

PayPal derived the selected consolidated income statement data for the years ended December 31, [added: 2019,] 2018, [removed: 2017,] and [removed: 2016] [added: 2017] and the selected consolidated balance sheet data as of December 31, [removed: 2018] [added: 2019] and [removed: 2017] [added: 2018] as set forth below, from its audited consolidated financial statements, which are included in “Item 15.

PayPal derived the selected consolidated income statement data for the years ended December 31, [removed: 2015] [added: 2016] and [removed: 2014] [added: 2015] and selected consolidated balance sheet data as of December 31, [added: 2017,] 2016, [removed: 2015,] and [removed: 2014] [added: 2015] from audited consolidated financial statements not included in this Annual Report on Form 10-K.

| | [removed: Year] [added: Year] Ended December [removed: 31,] [added: 31,] | | | | | | | | | | | | | | | | | | |

| | [removed: 2018] [added: 2019] | | | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | |

| | [removed: (In] [added: (In] millions, except per share [removed: amounts)] [added: amounts)] | | | | | | | | | | | | | | | | | | |

| [removed: Consolidated] [added: Consolidated] Statement of Income [removed: Data:] [added: Data:] | | | | | | | | | | | | | | | | | | | |

| Net revenues | $ | [removed: 15,451] [added: 17,772] | | | $ | [removed: 13,094] [added: 15,451] | | | $ | [removed: 10,842] [added: 13,094] | | | $ | [removed: 9,248] [added: 10,842] | | | $ | [removed: 8,025] [added: 9,248] | |

| Operating income | [removed: 2,194] [added: 2,719] | | | | [removed: 2,127] [added: 2,194] | | | | [removed: 1,586] [added: 2,127] | | | | [removed: 1,461] [added: 1,586] | | | | [removed: 1,268] [added: 1,461] | | |

| Net income | [removed: 2,057] [added: 2,459] | | | | [removed: 1,795] [added: 2,057] | | | | [removed: 1,401] [added: 1,795] | | | | [removed: 1,228] [added: 1,401] | | | | [removed: 419] [added: 1,228] | | |

| Basic | $ | [removed: 1.74] [added: 2.09] | | | $ | [removed: 1.49] [added: 1.74] | | | $ | [removed: 1.16] [added: 1.49] | | | $ | [removed: 1.00] [added: 1.16] | | | $ | [removed: 0.34] [added: 1.00] | |

| Diluted | $ | [removed: 1.71] [added: 2.07] | | | $ | [removed: 1.47] [added: 1.71] | | | $ | [removed: 1.15] [added: 1.47] | | | $ | [removed: 1.00] [added: 1.15] | | | $ | [removed: 0.34] [added: 1.00] | |

| Weighted average [removed: shares(1)(2):] [added: shares(1):] | | | | | | | | | | | | | | | | | | | |

| Basic | [removed: 1,184] [added: 1,174] | | | | [removed: 1,203] [added: 1,184] | | | | [removed: 1,210] [added: 1,203] | | | | [removed: 1,222] [added: 1,210] | | | | [removed: 1,218] [added: 1,222] | | |

| Diluted | [removed: 1,203] [added: 1,188] | | | | [removed: 1,221] [added: 1,203] | | | | [removed: 1,218] [added: 1,221] | | | | [removed: 1,229] [added: 1,218] | | | | [removed: 1,224] [added: 1,229] | | |

| [removed: Consolidated] [added: Consolidated] Balance Sheet [removed: Data:] [added: Data:] | | | | | | | | | | | | | | | | | | | |

| Total assets | $ | [removed: 43,332] [added: 51,333] | | | $ | [removed: 40,774] [added: 43,332] | | | $ | [removed: 33,103] [added: 40,774] | | | $ | [removed: 28,881] [added: 33,103] | | | $ | [removed: 21,917] [added: 28,881] | |

| Total long-term liabilities | [removed: 2,042] [added: 7,485] | | | | [removed: 1,917] [added: 2,042] | | | | [removed: 1,513] [added: 1,917] | | | | [removed: 1,505] [added: 1,513] | | | | [removed: 386] [added: 1,505] | | |

[removed: (1)] On July 17, 2015, the distribution date, eBay stockholders of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held as of the record date.

[removed: Basic] [added: The weighted average number of common shares outstanding for basic] and diluted [removed: net income] [added: earnings] per share for the year ended December 31, [removed: 2014] [added: 2015] was [removed: calculated using] [added: based on] the number of common shares distributed on July 17, [removed: 2015.][added: 2015 for the period prior to distribution and the weighted average number of common shares outstanding for the period beginning after the distribution date.]

(1) In 2015, PayPal became an independent publicly traded company through the pro rata distribution by eBay of 100% of the outstanding common stock of PayPal to eBay stockholders (which we refer to as the “separation” or the “distribution”).

(2) The weighted average number of common shares outstanding for basic and diluted earnings per share for the year ended December 31, 2015 was based on the number of common shares distributed on July 17, 2015 for the period prior to distribution and the weighted average number of common shares outstanding for the period beginning after the distribution date.

The audited consolidated financial statements covering the years ended December 31, [added: 2019,] 2018, [removed: 2017,] and [removed: 2016] [added: 2017] and accompanying notes listed in Part IV, Item 15(a)(1) of this Annual Report on Form 10‑K are included elsewhere in this report.

[added: *Evaluation of disclosure controls and procedures.*] Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), our principal executive officer and our principal financial officer have concluded that as of December 31, [removed: 2018,] [added: 2019,] the end of the period covered by this report, our disclosure controls and procedures were effective.

[removed: Management's] [added: *Management’s] report on internal control over financial [added: reporting.* Our management is responsible for establishing and maintaining adequate internal control over financial] reporting.

Our management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in [removed: Internal] [added: *Internal] Control - Integrated Framework [removed: (2013)] [added: (2013)*] issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on its evaluation under the framework in [removed: Internal] [added: *Internal] Control - Integrated [removed: Framework,] [added: Framework*,] our management concluded that our internal control over financial reporting was effective as of December 31, [removed: 2018.][added: 2019.]

The effectiveness of our internal control over financial reporting as of December 31, [removed: 2018] [added: 2019] has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Item 15(a) of this Annual Report on Form 10-K.

[added: *Changes in internal controls over financial reporting.*] There were no changes in our internal controls over financial reporting as defined in Exchange Act Rule 13a-15(f) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Evaluation of disclosure controls and procedures.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.

Changes in internal controls over financial reporting.

[removed: PART III][added: PART III]

Incorporated by reference from our Proxy Statement for our [removed: 2019] [added: 2020] Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, [removed: 2018.][added: 2019.]

Code of Ethics, Governance Guidelines and Committee Charters

We have adopted a Code of Business Conduct and Ethics that applies to all PayPal employees and directors.

We have also adopted a Code of Ethics for Senior Financial Officers that applies to our senior financial officers, including our principal executive officer, principal financial officer and principal accounting officer.

The Code of Ethics for Senior Financial Officers is included in our Code of Business Conduct and Ethics posted on our website at https://investor.paypal-corp.com/corporate-governance.cfm.

We will post any amendments to or waivers from the Code of Ethics for Senior Financial Officers at that location.

Incorporated by reference from our Proxy Statement for our [removed: 2019] [added: 2020] Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, [removed: 2018.][added: 2019.]

Incorporated by reference from our Proxy Statement for our [removed: 2019] [added: 2020] Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, [removed: 2018.][added: 2019.]

Incorporated by reference from our Proxy Statement for our [removed: 2019] [added: 2020] Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, [removed: 2018.][added: 2019.]

Incorporated by reference from our Proxy Statement for our [removed: 2019] [added: 2020] Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, [removed: 2018.][added: 2019.]

[removed: PART IV][added: PART IV]

| [removed: 1.] [added: 1.] Consolidated Financial [removed: Statements] [added: Statements] | [removed: Page Number] [added: Page Number] |

[removed: | [Report] [added: Report] of Independent Registered Public Accounting [removed: Firm](#s47C126FEE1195F7594CE7AF7EEC6DD92) | [66](#s47C126FEE1195F7594CE7AF7EEC6DD92) |][added: Firm]

[removed: | [Consolidated Balance Sheets](#s74FC64C0248454E3A0658E88CF0A28D4) | [68](#s74FC64C0248454E3A0658E88CF0A28D4) |][added: CONSOLIDATED BALANCE SHEETS]

[removed: | [Consolidated Statements of Income](#sE19CFD879C995C57AD3FC697E87C1C89) | [69](#sE19CFD879C995C57AD3FC697E87C1C89) |][added: CONSOLIDATED STATEMENTS OF INCOME]

[removed: | [Consolidated Statements of Comprehensive Income](#s2DB2B715C886518298166E9FFC8CB35A) | [70](#s2DB2B715C886518298166E9FFC8CB35A) |][added: CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME]

[removed: | [Consolidated Statements of Stockholders' Equity](#s5B43C85EA3C25E7EADE3E77CACA96222) | [71](#s5B43C85EA3C25E7EADE3E77CACA96222) |][added: CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY]

[removed: | [Consolidated Statements of Cash Flows](#s6782C61728055058BF0AF51E8FBBB5E9) | [72](#s6782C61728055058BF0AF51E8FBBB5E9) |][added: CONSOLIDATED STATEMENTS OF CASH FLOWS]

[removed: | [Notes to Consolidated Financial Statements](#sFE71A0974EF650DEBED748BD65D94771) | [74](#sFE71A0974EF650DEBED748BD65D94771) |][added: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS]

| [removed: 2.] [added: 2.] Financial Statement [removed: Schedule] [added: Schedule] | |

| [removed: [Schedule] [added: [Schedule] II—Valuation and Qualifying [removed: Accounts](#sBA5B75D156E855B0805FDB138EC7F1E3)] [added: Accounts](#s916BC522206951E2B0A8D52635FD37BD)] | [removed: [121](#sBA5B75D156E855B0805FDB138EC7F1E3)] [added: [117](#s916BC522206951E2B0A8D52635FD37BD)] |

| [removed: [3.] [added: [3.] Exhibits Required by Item 601 of Regulation [removed: S-K](#sA144EF13F7FC5BE586CD3AB7DDF8D937)] [added: S-K](#sD40DFBC5D28F53D9B871B79A3780FA15)] | [added: [118](#sD40DFBC5D28F53D9B871B79A3780FA15)] |

[removed: Report] [added: | [Report] of Independent Registered Public Accounting [removed: Firm][added: Firm](#s598EF2193C485F15BB54C49685265DD5) | [60](#s598EF2193C485F15BB54C49685265DD5) |]

[removed: Opinions] [added: Opinions] on the Financial Statements and Internal Control over Financial [removed: Reporting][added: Reporting]

We have audited the accompanying consolidated balance sheets of PayPal Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] and the related consolidated statements of income, [added: of] comprehensive income, [added: of] stockholders’ equity and [added: of] cash flows for each of the three years in the period ended December 31, [removed: 2018,] [added: 2019,] including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, [removed: 2018] [added: 2019 listed in the index] appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, [removed: 2018,] [added: 2019,] based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, [removed: 2018] [added: 2019] and [removed: 2017,] [added: 2018,] and the results of its operations and its cash flows for each of the three years in the period ended December 31, [removed: 2018] [added: 2019] in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2018,] [added: 2019,] based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

[removed: Basis] [added: Basis] for [removed: Opinions][added: Opinions]

[removed: Definition] [added: Definition] and Limitations of Internal Control over Financial [removed: Reporting][added: Reporting]

[removed: PayPal] [added: PayPal] Holdings, [removed: Inc.][added: Inc.]

[removed: CONSOLIDATED BALANCE SHEETS][added: | [Consolidated Balance Sheets](#s1C367BFBF31B54739AAB95CC30496EA0) | [62](#s1C367BFBF31B54739AAB95CC30496EA0) |]

| | [removed: As] [added: As] of December [removed: 31,] [added: 31,] | | | | | | |

| | [removed: 2018] [added: 2019] | | | | [removed: 2017] [added: 2018] | | | [added: | 2017 | | |]

| | [removed: (In] [added: (In] millions, except par [removed: value)] [added: value)] | | | | | | |

| [removed: ASSETS] [added: ASSETS] | | | | | | | |

| Cash and cash equivalents | $ | [added: 7,349 | | | $ |] 7,575 | | | $ | 2,883 | |

| Short-term investments | [removed: 1,534] [added: 3,412] | | | | [removed: 2,812] [added: 1,534] | | |

| Accounts receivable, net | [removed: 313] [added: 435] | | | | [removed: 283] [added: 313] | | |

| Loans and interest receivable, net of allowances of [removed: $172] [added: $258] in [removed: 2018] [added: 2019] and [removed: $129] [added: $172] in [removed: 2017] [added: 2018] | [removed: 2,532] [added: 3,972] | | | | [removed: 1,314] [added: 2,532] | | |

| [removed: Loans] [added: Cost basis adjustments to loans] and interest [removed: receivable,] [added: receivable] held for sale | — | | | | [removed: 6,398] [added: 244] | | | [added: | 92 | | |]

| Funds receivable and customer accounts | [removed: 20,062] [added: 22,527] | | | | [removed: 18,242] [added: 20,062] | | |

| Prepaid expenses and other current assets | [removed: 947] [added: 800] | | | | [removed: 713] [added: 947] | | |

| Total current assets | [removed: 32,963] [added: 38,495] | | | | [removed: 32,645] [added: 32,963] | | |

| Long-term investments | [removed: 971] [added: 2,863] | | | | [removed: 1,961] [added: 971] | | |

| Property and equipment, net | [removed: 1,724] [added: 1,693] | | | | [removed: 1,528] [added: 1,724] | | |

| Goodwill | [removed: 6,284] [added: 6,212] | | | | [removed: 4,339] [added: 6,284] | | |

| Intangible assets, net | [removed: 825] [added: 778] | | | | [removed: 168] [added: 825] | | |

| Other assets | [removed: 565] [added: 1,292] | | | | [removed: 133] [added: 565] | | |

| Total assets | $ | [removed: 43,332] [added: 51,333] | | | $ | [removed: 40,774] [added: 43,332] | |

| [removed: LIABILITIES] [added: LIABILITIES] AND [removed: EQUITY] [added: EQUITY] | | | | | | | |

*Change in Accounting Principle*

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of January 1, 2019.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

*Accounting for Income Taxes*

As described in Notes 1 and 16 to the consolidated financial statements, the Company's accounting for income taxes requires the reporting of liabilities for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken on tax returns.

Significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertain tax positions related to complex tax laws which may be subject to different interpretations by the taxpayer and respective government taxing authorities.

The Company’s effective income tax rate for the year ended December 31, 2019 is 18% as compared to the federal statutory rate of 21%.

The difference between the effective income tax rate and the federal statutory rate is primarily the result of foreign income taxed at rates other than the federal statutory rate and stock based compensation deductions, partially offset by incremental tax expense related to the intra-group transfer of intellectual property.

The Company also benefits from tax rulings concluded in several jurisdictions, most significantly Singapore and Luxembourg.

The principal considerations for our determination that performing procedures relating to accounting for income taxes is a critical audit matter are there was significant judgment by management in determining the income tax provision and other tax positions, specifically taxable income by jurisdiction taxed at rates other than the federal statutory rate and the identification of uncertain tax positions and assessment of the technical merits of those positions.

This in turn led to a high level of effort, and degree of subjectivity, in performing our audit procedures and in evaluating audit evidence relating to income taxes.

Also, the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures involved testing the effectiveness of controls relating to accounting for income taxes, including controls over the assessment of uncertain tax positions, and determination of foreign income taxed at rates other than the federal statutory rate.

These procedures also included, among others, (1) testing the income tax provision, including taxable income by jurisdiction, (2) testing management’s process for evaluating tax rulings and compliance with related requirements in certain foreign jurisdictions such as Singapore and Luxembourg, (3) testing the identification of reserves for unrecognized tax benefits and the reasonableness of the “more likely than not” determination, which includes certain considerations including, but not limited to, jurisdictions involved, court decisions, legislative actions and guidance, and developments in tax examinations, and (4) testing the calculation of the liability for uncertain tax positions by jurisdiction, including management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained for each uncertain tax position selected for testing.

Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of management’s judgment and estimates, including application of foreign and domestic tax laws and regulations.

February 6, 2020

| | 2019 | | | | 2018 | | |

| Short-term debt | — | | | | 1,998 | | |

| Long-term debt | 4,965 | | | | — | | |

| Preferred stock, $0.0001 par value; 100 shares authorized, unissued | — | | | | — | | |

| Total PayPal Stockholders’ equity | 16,885 | | | | 15,386 | | |

| Noncontrolling interest | 44 | | | | — | | |

PayPal Holdings, Inc.

| Customer support and operations | 1,615 | | | | 1,407 | | | | 1,265 | | |

| Sales and marketing | 1,401 | | | | 1,314 | | | | 1,142 | | |

| Technology and development | 2,085 | | | | 1,831 | | | | 1,740 | | |

| General and administrative | 1,711 | | | | 1,541 | | | | 1,258 | | |

PayPal Holdings, Inc.

| Net investment hedge CTA loss | (31 | | ) | | — | | | | — | | |

PayPal Holdings, Inc.

| Tax benefit on unrealized losses on cash flow hedges, net | — | | | — | | | | — | | | | 4 | | | | — | | | | — | | | | 4 | | |

| Unrealized gains on cash flow hedges, net | — | | | — | | | | — | | | | 293 | | | | — | | | | — | | | | 293 | | |

| Adoption of lease accounting standard | | | | | | | | | | | | | | | | 3 | | | | — | | | | 3 | | |

| Net income | — | | | — | | | | — | | | | — | | | | 2,459 | | | | — | | | | 2,459 | | |

| Net investment hedge CTA loss | — | | | — | | | | — | | | | (31 | | ) | | — | | | | — | | | | (31 | | ) |

| Unrealized losses on cash flow hedges, net | — | | | — | | | | — | | | | (176 | | ) | | — | | | | — | | | | (176 | | ) |

| Tax benefit on unrealized losses on cash flow hedges, net | — | | | — | | | | — | | | | 3 | | | | — | | | | — | | | | 3 | | |

February 7, 2019

| Notes payable | 1,998 | | | | 1,000 | | |

| | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Balances at December 31, 2015 | 1,224 | | | $ | — | | | $ | 13,100 | | | $ | (9 | ) | | $ | 668 | | | $ | 13,759 | |

| Change in unrealized gains (losses) on hedging activities, net | — | | | — | | | | — | | | | (242 | | ) | | — | | | | (242 | | ) |

| Change in unrealized gains (losses) on hedging activities, net | — | | | — | | | | — | | | | 293 | | | | — | | | | 293 | | |

| Excess tax benefits from stock-based compensation | — | | | | — | | | | (40 | | ) |

| Other | (172 | | ) | | (25 | | ) | | (24 | | ) |

| Excess tax benefits from stock-based compensation | — | | | | — | | | | 40 | | |

We have evaluated all subsequent events through the date the financial statements were issued.

Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits.

Corporate debt securities and government and agency securities are classified as available-for-sale and are reported at fair value using the specific identification method.

Our equity investments consist primarily of minority equity interests in companies that are not publicly traded where we do not have the ability to exercise significant influence, or have control over the investee, and are reported in long-term investments on our consolidated balance sheets.

The equity method investments are subject to periodic testing for other-than-temporary impairment.

Historically, this portfolio was reported as outstanding principal balances, net of any participation interest sold and pro-rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees.

This transaction was accounted for as a true sale based on our determination that it met all the necessary criteria for such accounting, including legal isolation for transferred assets, ability of the transferee to pledge or exchange the transferred assets without constraint, and the transfer of control.

We also concluded that our continuing involvement in the revenue share arrangement does not invalidate this determination.

However, we had a separate arrangement with certain investors under which we sold to these investors a participation interest in certain U.S. consumer loans receivable that we purchased where the consideration received exceeded the carrying amount of the participation interest sold, which resulted in a gain reflected as net revenues in our consolidated financial statements.

All risks of loss were shared pro rata based on participation interests held among all participating stakeholders.

We applied a control-oriented, financial-components approach and accounted for the asset transfer as a sale and derecognized the portion of the participation interest for which control had been surrendered.

In connection with its purchase of our U.S. consumer credit receivable portfolio, Synchrony Bank also acquired the participation interests in the pool of consumer receivables held by the chartered financial institution and other investors.

During the years ended December 31, 2018 and 2017, we purchased approximately $3.3 billion and $1.5 billion, respectively, in merchant receivables.

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 and other investors 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.

In connection with our agreement to sell our U.S. consumer credit receivables to Synchrony Bank and the designation of that portfolio as held for sale, in November 2017, we reversed the corresponding allowances against those loans and interest receivable balances.

No additional amount has been designated for corporate usage by management during the year ended December 31, 2018.

Goodwill is tested for impairment at a minimum on an annual basis.

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 enter into foreign currency exchange contracts that qualify as cash flow hedges, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies.

All outstanding derivatives are recognized in our consolidated balance sheets at fair value.

Prior to and during 2018, we evaluated the effectiveness of some of our foreign currency exchange contracts on a monthly basis by comparing the change in the fair value of the derivative instruments with the change in the fair value of the forecasted cash flows of the hedged item.

We also hedge our economic exposure to foreign currency denominated monetary assets and liabilities with foreign currency contracts.

Accordingly, these outstanding non-designated derivatives are recognized in our consolidated balance sheets at fair value, and changes in fair value from these contracts are recorded in other income (expense), net in the consolidated statements of income.

Our hedging program is not designed or operated for trading or speculative purposes.

Our derivative instruments expose us to credit risk to the extent counterparties may be unable to meet the terms of the arrangement.

We seek to mitigate such risk by limiting 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 one counterparty resulting from this type of credit risk is monitored on an ongoing basis.

Other income (expense), net also includes observable price changes on our equity investments recorded using the Measurement Alternative and foreign exchange gains and losses.

In 2017, the FASB issued new guidance that requires certain premiums on callable debt securities to be amortized to the earliest call date.

[removed: Exhibit Index][added: Exhibit Index]

| | | | | [removed: Incorporated] [added: Incorporated] by [removed: Reference] [added: Reference] | |

| [removed: Exhibit Number] [added: Exhibit Number] | | [removed: Exhibit Description] [added: Exhibit Description] | [removed: Filed] [added: Filed] with this Form [removed: 10-K] [added: 10-K] | [removed: Form] [added: Form] | [removed: Date Filed] [added: Date Filed] |

| [2.03](http://www.sec.gov/Archives/edgar/data/1633917/000119312517345552/d496328dex22.htm) | | Purchase and Sale Agreement, dated as of November 10, 2017, by and between Synchrony Bank and PayPal (Europe) [removed: SÀ R.L.] [added: S.à r.l.] et [removed: CIE,] [added: Cie.] S.C.A. | | 8-K | 11/16/2017 |

| [2.05](http://www.sec.gov/Archives/edgar/data/1633917/000163391718000171/exhibit202luxamendmentno1.htm) | | Amendment No. 1 to the Purchase and Sale Agreement, dated as of April 12, 2018, by and between Synchrony Bank and PayPal (Europe) [removed: S.À R.L.] [added: S.à r.l.] et [removed: CIE,] [added: Cie.] S.C.A. | | 10-Q | 7/26/2018 |

| [removed: [10.06](http://www.sec.gov/Archives/edgar/data/1633917/000119312515257108/d31081dex106.htm)] [added: [10.07](http://www.sec.gov/Archives/edgar/data/1633917/000119312519244026/d803876dex102.htm)] | | [added: 364-Day] Credit [removed: and Guarantee] Agreement, dated as of [removed: July 17, 2015, by and] [added: September 11, 2019,] among PayPal Holdings, Inc., [removed: PayPal, Inc.,] [added: the Lenders party thereto and] JPMorgan Chase Bank, N.A., as Administrative [removed: Agent, and the other parties thereto.] [added: Agent] | | 8-K | [removed: 7/20/2015] [added: 9/12/2019] |

| [removed: [10.07](http://www.sec.gov/Archives/edgar/data/1633917/000119312517362257/d505202dex101.htm)] [added: [10.06](http://www.sec.gov/Archives/edgar/data/1633917/000119312519244026/d803876dex101.htm)] | | [removed: 364-Day] Credit [removed: and Guarantee] Agreement, dated as of [removed: December 5, 2017, by and] [added: September 11, 2019,] among PayPal Holdings, Inc., [removed: PayPal, Inc.,] the [added: Designated Borrowers party thereto, the] Lenders party thereto and JPMorgan Chase Bank, N.A., [added: J.P. Morgan Securities Australia Limited, JPMorgan Chase Bank, N.A., Toronto Branch, and J.P. Morgan Europe Limited,] as [added: the] Administrative [removed: Agent.] [added: Agents] | | 8-K | [removed: 12/6/2017] [added: 9/12/2019] |