This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans, or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, mergers or acquisitions, or management strategies). Additionally, our forward looking statements include expectations related to anticipated impacts of the coronavirus pandemic. These forward-looking statements can be identified by words such as "may," "will," "would," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "strategy," "future," "opportunity," "plan," "project," "forecast," and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results and financial condition to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Form 10-K"), as supplemented in the risk factors set forth below in Part II, Item 1A, Risk Factors, of this Form 10-Q, as well as in our unaudited condensed consolidated financial statements, related notes, and the other information appearing in this report and our other filings with theSecurities and Exchange Commission ("SEC"). We do not intend, and undertake no obligation except as required by law, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should read the following "Management's Discussion and Analysis of Financial Condition and Results of Operations" in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear in this report. Unless otherwise expressly stated or the context otherwise requires, references to "we," "our," "us," "the Company," and "PayPal" refer toPayPal Holdings, Inc. and its consolidated subsidiaries. BUSINESS ENVIRONMENT THE COMPANY We are a leading technology platform and digital payments company that enables digital and mobile payments on behalf of merchants and consumers worldwide.PayPal is committed to democratizing financial services to improve the financial health of individuals and to increase economic opportunity for entrepreneurs and businesses of all sizes around the world. Our goal is to enable our merchants and consumers to manage and move their money anywhere in the world, anytime, on any platform, and using any device when sending payments or getting paid. We also facilitate person-to-person ("P2P") payments through ourPayPal , Venmo, and Xoom products and services and simplify and personalize shopping experiences for our consumers through our Honey Platform. Our combined payment solutions, including our corePayPal ,PayPal Credit,Braintree , Venmo, Xoom, Zettle, andHyperwallet products and services, comprise our proprietary Payments Platform.
Regulatory environment
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened focus by regulators globally on all aspects of the payments industry, including countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. The laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including the changes to their interpretation and implementation, as well as increased penalties and enforcement actions related to non-compliance, could have a material adverse impact on our business, results of operations, and financial condition. We monitor these areas closely and are focused on designing compliant solutions for our customers.
Information security
Information security risks for global payments and technology companies like us have increased significantly in recent years. Although we have developed systems and processes designed to protect the data we manage, prevent data loss and other security incidents and effectively respond to known and potential risks, and expect to continue to expend significant resources to bolster these protections, we remain subject to these risks and there can be no assurance that our security measures will provide sufficient security or prevent breaches or attacks. For additional information regarding our information security risks, see Part I, Item 1A, Risk Factors in our 2020 Form 10-K, as supplemented and, to the extent inconsistent, superseded below (if applicable) in Part II, Item 1A, Risk Factors in this Form 10-Q. [[Image Removed: pypl-20210331_g2.jpg]] 39
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COVID-19
The coronavirus ("COVID-19") pandemic resulted in government authorities and businesses throughout the world implementing numerous measures intended to contain and limit the spread of COVID-19, including travel restrictions, border closures, quarantines, shelter-in-place and lock-down orders, mask and social distancing requirements, and business limitations and shutdowns. The spread of COVID-19 has caused us to make significant modifications to our business practices, including enabling most of our workforce to work from home, establishing strict health and safety protocols for our offices, restricting physical participation in meetings, events, and conferences and imposing restrictions on employee travel. We will continue to actively monitor the situation and may take further actions that may alter our business practices as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, or business partners. The spread of COVID-19 has also accelerated the shift from in-store shopping and traditional in-store payment methods (e.g. cash) towards e-commerce and digital payments and resulted in increased customer demand for safer payment and delivery solutions (e.g. contactless payment methods, buy online and pick up in store) and a significant increase in online spending in certain verticals that have historically had a strong in-store presence. On balance, our business has benefited from these behavioral shifts, including a significant increase in net new active accounts and payments volume. To the extent that consumers revert to pre-COVID-19 behaviors as mitigation measures to limit the spread of COVID-19 are lifted or relaxed and effective vaccines for COVID-19 are available and widely distributed, our business, financial condition, and results of operations could be adversely impacted. The rapidly changing global market and economic conditions as a result of the COVID-19 pandemic have impacted, and are expected to continue to impact, our operations and business. The broader implications of the COVID-19 pandemic on our business, financial condition, and results of operations remain uncertain. For additional information on how the COVID-19 pandemic has impacted and could continue to negatively impact our business, see below for specific discussion in the respective areas, and also refer to Part I, Item 1A, Risk Factors in our 2020 Form 10-K. BREXIT TheUnited Kingdom ("U.K.") formally exited theEuropean Union ("EU") and the European Economic Area ("EEA") onJanuary 31, 2020 (commonly referred to as "Brexit") with the expiration of a transition period onDecember 31, 2020 .PayPal (Europe ) S.à.r.l. et Cie, SCA ("PayPal (Europe )") operates in theU.K. within the scope of its passport permissions (as they stood at the end of the transition period) under the Temporary Permissions Regime pending the grant of newU.K. authorizations by theU.K financial regulators. We are currently unable to determine the longer-term impact that Brexit will have on our business, which will depend, in part, on the implications of new tariff, trade, and regulatory frameworks that now govern the provision of cross-border goods and services between theU.K. and the EEA, as well as the financial and operational consequences of the requirement forPayPal (Europe ) to obtain newU.K. authorizations to operate its business longer-term within theU.K. market. For additional information on how Brexit could affect our business, see Part I, Item 1A, Risk Factors in our 2020 Form 10-K, as supplemented and, to the extent inconsistent, superseded below (if applicable) in Part II, Item 1A, Risk Factors in this Form 10-Q. Brexit may contribute to instability in financial, stock, and foreign currency exchange markets, including volatility in the value of the British Pound and Euro. We have foreign currency exchange exposure management programs designed to help reduce the impact from foreign currency exchange rate movements. Net revenues generated from ourU.K. operations constituted 10% of total net revenues for both the three months endedMarch 31, 2021 and 2020. During the three months endedMarch 31, 2021 and 2020, net revenues generated from the EU (excluding theU.K. ) constituted 21% and 17% of total net revenues, respectively. Approximately 52% and 50% of our gross loans and interest receivables as ofMarch 31, 2021 andDecember 31, 2020 , respectively, were due from customers in theU.K. Approximately 15% and 14% of our gross loans and interest receivables as ofMarch 31, 2021 andDecember 31, 2020 , respectively, were due from customers in the EU (excluding theU.K. ). [[Image Removed: pypl-20210331_g2.jpg]] 40
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OVERVIEW OF RESULTS OF OPERATIONS
The following table provides a summary of our condensed consolidated financial
results for the three months ended
Three Months Ended March 31, 2021 2020 Percent Increase/(Decrease) (In millions, except percentages and per share data) Net revenues$ 6,033 $ 4,618 31 % Operating expenses 4,991 4,220 18 % Operating income$ 1,042 $ 398 162 % Operating margin 17 % 9 % ** Other income (expense), net$ (170) $ (135) (26) % Income tax (benefit) expense$ (225) $ 179 (226) % Effective tax rate (26) % 68 % ** Net income$ 1,097 $ 84 1,206 % Net income per diluted share$ 0.92 $ 0.07 1,200 % Net cash provided by operating activities(1)$ 1,758 $ 1,421 24 % All amounts in tables are rounded to the nearest million, except as otherwise noted. As a result, certain amounts may not recalculate using the rounded amounts provided. (1) Prior period amounts have been revised to conform to the current presentation. For additional information, see "Note 1-Overview and Summary of Significant Accounting Policies" in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q. ** Not meaningful
THREE MONTHS ENDED
Net revenues increased$1.4 billion , or 31%, in the three months endedMarch 31, 2021 compared to the same period of the prior year driven primarily by growth in total payment volume ("TPV", as defined below under "Net Revenues") of 50%. Total operating expenses increased$771 million , or 18%, in the three months endedMarch 31, 2021 compared to the same period of the prior year due primarily to an increase in transaction expense, and to a lesser extent, increases in sales and marketing expenses, technology and development expenses, and customer support and operations expenses. These increases were partially offset by a decline in transaction and credit losses. Operating income increased by$644 million , or 162%, in the three months endedMarch 31, 2021 compared to the same period of the prior year due to growth in net revenues, partially offset by an increase in operating expenses. Our operating margin was 17% and 9% in the three months endedMarch 31, 2021 and 2020, respectively. Operating margin for the three months endedMarch 31, 2021 was positively impacted primarily by the decrease in transaction and credit losses, and to a lesser extent, by operating efficiencies. Net income increased by$1.0 billion in the three months endedMarch 31, 2021 compared to the same period of the prior year due to the previously discussed increase in operating income of$644 million and a decrease in income tax expense of$404 million , driven primarily by tax expense related to the intra-group transfer of intellectual property in the three months ended March, 31, 2020 with no comparable activity in the current period and an increase in tax benefits associated with discrete tax adjustments, partially offset by a decrease of$35 million in other income (expense), net. IMPACT OF FOREIGN CURRENCY EXCHANGE RATES We have significant international operations that are denominated in foreign currencies, primarily the British Pound, Euro, Australian dollar, and Canadian dollar, subjecting us to foreign currency exchange risk which may adversely impact our financial results. The strengthening or weakening of theU.S. dollar versus the British Pound, Euro, Australian dollar, and Canadian dollar, as well as other currencies in which we conduct our international operations, impacts the translation of our net revenues and expenses generated in these foreign currencies into theU.S. dollar. We generated approximately 49% and 47% of our net revenues from customers domiciled outside of theU.S. in the three months endedMarch 31, 2021 and 2020, respectively. Because we generate substantial net revenues internationally, we are subject to the risks of doing business outside of theU.S. See Part I, Item 1A, Risk Factors in our 2020 Form 10-K, as supplemented and, to the extent inconsistent, superseded (if applicable) below in Part II, Item 1A, Risk Factors in this Form 10-Q. [[Image Removed: pypl-20210331_g2.jpg]] 41
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We calculate the year-over-year impact of foreign currency exchange movements on our business using prior period foreign currency exchange rates applied to current period transactional currency amounts. While changes in foreign currency exchange rates affect our reported results, we have a foreign currency exchange exposure management program in which we designate certain foreign currency exchange contracts as cash flow hedges intended to reduce the impact on earnings from foreign currency exchange rate movements. Gains and losses from these foreign currency exchange contracts are recognized as a component of transaction revenues in the same period the forecasted transactions impact earnings. In the three months endedMarch 31, 2021 , year-over-year foreign currency movements relative to theU.S. dollar had the following impact on our reported results: Three Months Ended March 31, 2021 (In millions) Favorable impact to net revenues (exclusive of hedging impact) $ 190 Hedging impact (59) Favorable impact to net revenues 131 Unfavorable impact to operating expense (73) Net favorable impact to operating income $ 58 While we enter into foreign currency exchange contracts to help reduce the impact on earnings from foreign currency exchange rate movements, it is impossible to predict or eliminate the total effects of this exposure. Additionally, in connection with transactions occurring in multiple currencies on our Payments Platform, we generally set our foreign currency exchange rates daily, and may face financial exposure if we incorrectly set our foreign currency exchange rates or as a result of fluctuations in foreign currency exchange rates between the times that we set our foreign currency exchange rates. Given that we also have foreign currency exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries, we have an additional foreign currency exchange exposure management program in which we use foreign currency exchange contracts to offset the impact of foreign currency exchange rate movements on our assets and liabilities. The foreign currency exchange gains and losses on our assets and liabilities are recorded in other income (expense), net, and are offset by the gains and losses on the foreign currency exchange contracts. These foreign currency exchange contracts reduce, but do not entirely eliminate, the impact of foreign currency exchange rate movements on our assets and liabilities.
FINANCIAL RESULTS
NET REVENUES Our revenues are classified into the following two categories: •Transaction revenues: Net transaction fees charged to merchants and consumers on a transaction basis primarily based on the TPV completed on our Payments Platform. Growth in TPV is directly impacted by the number of payment transactions that we enable on our Payments Platform. We earn additional fees on transactions where we perform currency conversion, when we enable cross-border transactions (i.e., transactions where the merchant and consumer are in different countries), to facilitate the instant transfer of funds for our customers from theirPayPal or Venmo account to their debit card or bank account, to facilitate the purchase and sale of cryptocurrencies, and other miscellaneous fees. •Revenues from other value added services: Net revenues derived primarily from revenue earned through partnerships, referral fees, subscription fees, gateway fees, and other services we provide to our merchants and consumers. We also earn revenues from interest and fees earned primarily on our portfolio of loans receivable, and interest earned on certain assets underlying customer balances. [[Image Removed: pypl-20210331_g2.jpg]] 42
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Active accounts, number of payment transactions, number of payment transactions per active account, and TPV are key non-financial performance metrics ("key metrics") that management uses to measure the performance of our business, and are defined as follows: •An active account is an account registered directly withPayPal or a platform access partner that has completed a transaction on our Payments Platform or through our Honey Platform, not including gateway-exclusive transactions, within the past 12 months. A platform access partner is a third party whose customers are provided access toPayPal 's Payments Platform through such third party's login credentials. The number of active accounts provides management with additional perspective on the growth of accounts across our Payments and Honey Platforms as well as the overall scale of our platforms. •Number of payment transactions are the total number of payments, net of payment reversals, successfully completed on our Payments Platform or enabled byPayPal via a partner payment solution, not including gateway-exclusive transactions. •Number of payment transactions per active account reflects the total number of payment transactions within the previous 12-month period, divided by active accounts at the end of the period. The number of payment transactions per active account provides management with insight into the number of times a customer is engaged in payments activity on our Payments Platform in a given period. •TPV is the value of payments, net of payment reversals, successfully completed on our Payments Platform, or enabled byPayPal via a partner payment solution, not including gateway-exclusive transactions. As our transaction revenue is typically correlated with TPV growth and the number of payment transactions completed on our Payments Platform, management uses these metrics to gain insights into the scale and strength of our Payments Platform, the engagement level of our customers, and underlying activity and trends which are indicators of current and future performance. We present these key metrics to enhance investors' evaluation of the performance of our business and operating results. Net revenue analysis
The components of our net revenues for the three months ended
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Table of Contents Transaction revenues Transaction revenues grew by$1.4 billion , or 33%, for the three months endedMarch 31, 2021 compared to the same period of the prior year. The increase was mainly attributable to our corePayPal products and services, and to a lesser extentBraintree products and services, due primarily to strong growth in TPV and the number of payment transactions, both of which resulted primarily from an increase in our active accounts. In the first quarter of 2020, we experienced an adverse impact on our TPV and transaction revenues due to the initial implications of the COVID-19 pandemic. The shift beginning in the second quarter of 2020 from in-store payment methods to digital payments (as described above) has continued to benefit our business. The graphs below present the respective key metrics (in millions) for the three months endedMarch 31, 2021 and 2020: [[Image Removed: pypl-20210331_g4.jpg]][[Image Removed: pypl-20210331_g5.jpg]][[Image Removed: pypl-20210331_g6.jpg]] *Reflects active accounts at the end of the applicable period. Active accounts as ofMarch 31, 2020 includes 10.2 million active accounts contributed by Honey on the date of acquisition inJanuary 2020 . The following table provides a summary of related metrics: Three Months Ended March 31, Percent 2021 2020 Increase/(Decrease) Number of payment transactions per active account 42.2 39.4 7 % Percent of cross-border TPV 17 % 17 % ** ** Not meaningful We had 392 million active accounts as ofMarch 31, 2021 compared to 325 million as ofMarch 31, 2020 , an increase of 21%. Number of payment transactions were 4.4 billion for the three months endedMarch 31, 2021 compared to 3.3 billion in the three months endedMarch 31, 2020 , an increase of 34%. TPV was$285 billion for the three months endedMarch 31, 2021 compared to$191 billion in the three months endedMarch 31, 2020 , an increase of 50%. Transaction revenues grew more slowly than TPV and number of payment transactions for the three months endedMarch 31, 2021 compared to the same period in the prior year due primarily to a higher portion of TPV generated by platform partners and large merchants who generally pay lower rates with higher transaction volumes and unfavorable impact from hedging. Changes in prices charged to our customers did not significantly impact transaction revenue growth for the three months endedMarch 31, 2021 .
Revenues from other value added services
For the three months endedMarch 31, 2021 , revenues from other value added services increased$9 million , or 2%, compared to the same period in the prior year primarily attributable to increases in our revenue share withSynchrony Bank ("Synchrony") and interest and fee revenue on our consumer loans receivable portfolio driven by growth in international markets. This was partially offset by decreases in interest and fee revenue on our merchant loans receivable portfolio due to a decline in originations and on interest earned on certain assets underlying customer account balances resulting from lower interest rates. The total gross consumer and merchant loans receivable balance was$3.5 billion as ofMarch 31, 2021 and$4.5 billion as ofMarch 31, 2020 , reflecting a year-over-year decrease of 22% driven by a decline in our merchant receivable portfolio due to reduced originations, partially offset by growth in our consumer receivable portfolio due to increased originations. [[Image Removed: pypl-20210331_g2.jpg]] 44
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In response to the COVID-19 pandemic, we took both proactive and reactive measures during 2020 to support our merchants and consumers that had loans and interest receivables due to us under our credit product offerings. These measures were intended to help reduce financial difficulties experienced by our customers and included providing payment holidays to grant payment deferrals to certain borrowers for varying periods of time, and amended payment terms through loan modifications in certain cases. These measures have adversely impacted and may continue to adversely impact the recognition of interest and fee income in future periods. Given the uncertainty surrounding the COVID-19 pandemic, including its duration and severity and the ultimate impact it may have on the financial condition of our merchants and consumers, the extent of these types of actions and their prospective impact on our interest and fee income is not determinable. In addition, consumers that have outstanding loans and interest receivable due to Synchrony may experience similar hardships that result in increased losses recognized by Synchrony, which may result in a decrease in our revenue share earned from Synchrony in future periods. In the event the overall return on thePayPal branded credit programs funded by Synchrony does not meet a minimum rate of return ("minimum return threshold") in a particular quarter, our revenue share for that period would be zero. Further, in the event the overall return on thePayPal branded credit programs managed by Synchrony does not meet the minimum return threshold as measured over four consecutive quarters and in the following quarter, we would be required to make a payment to Synchrony, subject to certain limitations. ThroughMarch 31, 2021 , the overall return on thePayPal branded credit programs funded by Synchrony exceeded the minimum return threshold.
OPERATING EXPENSES
The following table summarizes our operating expenses and related metrics we use to assess the trends in each:
Three Months Ended March 31, Percent Increase/(Decrease) 2021 2020 (In millions, except percentages) Transaction expense$ 2,275 $ 1,739 31 % Transaction and credit losses 273 591 (54) % Customer support and operations 518 399 30 % Sales and marketing 602 371 62 % Technology and development 741 605 22 % General and administrative 524 486 8 % Restructuring and other charges 58 29 100 % Total operating expenses$ 4,991 $ 4,220 18 % Transaction expense rate(1) 0.80 % 0.91 % ** Transaction and credit loss rate(2) 0.10 % 0.31 % ** (1) Transaction expense rate is calculated by dividing transaction expense by TPV. (2) Transaction and credit loss rate is calculated by dividing transaction and credit losses by TPV. ** Not meaningful [[Image Removed: pypl-20210331_g2.jpg]] 45
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Table of Contents Transaction expense
Transaction expense for the three months ended
[[Image Removed: pypl-20210331_g7.jpg]] Transaction expense increased by$536 million , or 31%, in the three months endedMarch 31, 2021 compared to the same period of the prior year due primarily to the increase in TPV of 50%. The decrease in transaction expense rate for the three months endedMarch 31, 2021 compared to the same period of the prior year was due primarily to favorable changes in funding mix, merchant mix, and product mix. Our transaction expense rate is impacted by changes in product mix, merchant mix, regional mix, funding mix, and assessments charged by payment processors and other financial institutions when we draw funds from a customer's credit or debit card, bank account, or other funding sources. The cost of funding a transaction with a credit or debit card is generally higher than the cost of funding a transaction from a bank or through internal sources such as aPayPal or Venmo account balance, orPayPal Credit. For the three months endedMarch 31, 2021 and 2020, approximately 1% and 2% of TPV, respectively, was funded withPayPal Credit. For the three months endedMarch 31, 2021 and 2020, approximately 40% and 39% of TPV, respectively, was generated outside of theU.S. As we expand the availability and presentation of alternative funding sources to our customers, our funding mix may change, which could increase or decrease our transaction expense rate.
Transaction and credit losses
The components of our transaction and credit losses for the three months ended
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Transaction and credit losses decreased by
Transaction losses were$281 million in the three months endedMarch 31, 2021 compared to$247 million in the three months endedMarch 31, 2020 , an increase of$34 million , or 14%. Transaction loss rate (transaction losses divided by TPV) was 0.10% and 0.13% for the three months endedMarch 31, 2021 and 2020, respectively. The increase in transaction losses in the three months endedMarch 31, 2021 was primarily due to growth in TPV, partially offset by benefits realized through improvements in risk management capabilities, which contributed to a decrease in our transaction loss rate in the period, compared to the same period of the prior year. The duration and severity of the impacts of the COVID-19 pandemic remain unknown. The negative impact on macroeconomic conditions could increase the risk of merchant bankruptcy, insolvency, business failure, or other business interruption, which may adversely impact our transaction losses, particularly for merchants that sell goods or services in advance of the date of their delivery or use. Credit losses were a benefit of$8 million in the three months endedMarch 31, 2021 compared to losses of$344 million in the three months endedMarch 31, 2020 , a decrease of$352 million , or 102%. The benefit in three months endedMarch 31, 2021 was attributable to the reduction of our allowance for loans and interest receivable due to improvements in both current and projected macroeconomic conditions and the credit quality of loans outstanding, partially offset by an increase in the provision due to new originations. The provisions in the three months endedMarch 31, 2021 included the impact of qualitative adjustments to allowances for our merchant and consumer portfolios, which increased provisions in the current period, to account for a high degree of uncertainty around the financial health of our consumer and merchant borrowers including uncertainty around the effectiveness of loan modification programs made available to merchants, as well as volatility with respect to both the projected and actual macroeconomic conditions during the period. The losses in the three months endedMarch 31, 2020 were associated with an increase in provisions for our loans and interest receivable portfolio, which was significantly impacted by a deterioration in macroeconomic projections reflecting the anticipated impact of the COVID-19 pandemic, which was factored into the determination of our current expected credit losses, as well as growth in portfolio balances. The consumer loans and interest receivables balance as ofMarch 31, 2021 and 2020 was$2.2 billion and$1.4 billion , respectively, representing a year-over-year increase of 63% driven by growth of our installment credit products in theU.S. and international markets as well as growth ofPayPal Credit in international markets. Approximately 75% and 90% of our consumer loans receivable outstanding as ofMarch 31, 2021 and 2020, respectively, were due from consumers in theU.K. The decline in the percentage of consumer loans receivable outstanding in theU.K. atMarch 31, 2021 compared toMarch 31, 2020 was due to overall growth in the consumer loan portfolio, particularly from installment credit products in other markets.
The following table provides information regarding the credit quality of our consumer loans and interest receivable balance:
2021 2020 Percent of consumer loans and interest receivables current 97.2 % 96.4 % Percent of consumer loans and interest receivables > 90 days outstanding(1) 1.2 % 1.5 % Net charge off rate(2) 3.0 % 3.6 % (1) Represents percentage of balances which are 90 days past the billing date to the consumer or contractual repayment date on installment credit products. (2) Net charge off rate is the annual ratio of net credit losses, excluding fraud losses, on consumer loans receivables as a percentage of the average daily amount of consumer loans and interest receivables balance during the period. We offer access to credit products for certain small and medium-sized merchants, which we refer to as our merchant lending offerings. Total merchant loans, advances, and interest and fees receivable outstanding, net of participation interest sold, as ofMarch 31, 2021 were$1.2 billion , compared to$3.0 billion as ofMarch 31, 2020 , representing a year-over-year decrease of 61%. The decrease in merchant loans, advances, and interest and fees receivable outstanding was due primarily to a reduction in originations due to modifications in our acceptable risk parameters as well as a shift towards merchants borrowing through theU.S. Government's Paycheck Protection Program ("PPP") administered by theU.S. Small Business Administration ("SBA") and enacted inMarch 2020 under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in response to the COVID-19 pandemic. We do not own the receivables associated with loans originated through the PPP. We receive a fee for providing origination services and loan servicing for the loans and retain operational risk related to those activities. Approximately 79% and 11% of our merchant receivables outstanding as ofMarch 31, 2021 were due from merchants in theU.S. andU.K. , respectively, as compared to 84% and 10% as ofMarch 31, 2020 . [[Image Removed: pypl-20210331_g2.jpg]] 47
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The following table provides information regarding the credit quality of our merchant loans, advances, and interest and fees receivable balance:
2021(1) 2020
Percent of merchant receivables within original expected or contractual repayment period
82.1 % 89.6 %
Percent of merchant receivables > 90 days outstanding after the end of original expected or contractual repayment period
8.8 % 4.2 % Net charge off rate(2) 19.4 % 9.7 % (1) Includes the impact of merchants participating in the troubled debt restructuring programs as described in "Note 11-Loans and Interest Receivable" in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q. (2) Net charge off rate is the annual ratio of net credit losses, excluding fraud losses, on merchant loans and advances as a percentage of the average daily amount of merchant loans, advances, and interest and fees balance during the period. The decline in the percent of merchant receivables within the original expected or contractual repayment period, increase in percent of merchant receivables greater than 90 days outstanding, and increase in the net charge off rate for merchant receivables atMarch 31, 2021 as compared toMarch 31, 2020 was primarily due to an increase in payment delinquency driven by financial difficulties experienced by our merchants associated with the economic impact of the COVID-19 pandemic and a significant decline in our outstanding merchant receivables balance due to repayments and reduced originations, which increases net charge off and delinquency rates presented as a percentage of our outstanding loan balance. Beginning in the third quarter of 2020, we have granted certain merchants loan modifications intended to provide them with financial relief and help enable us to mitigate losses. The associated loans and interest receivables have been treated as troubled debt restructurings due to significant changes in their structure, including repayment terms and fee and rate structure. Modifications to the acceptable risk parameters of our credit products in 2020 in response to the impacts of the COVID-19 pandemic resulted in the implementation of a number of risk mitigation strategies, including reduction of maximum loan size, tightening eligibility terms, and a shift from automated to manual underwriting of loans and advances. These changes in acceptable risk parameters have resulted in a decrease in merchant receivables as ofMarch 31, 2021 . While the impact of the COVID-19 pandemic on the economic environment remains uncertain, the longer and more severe the pandemic, the more likely it is to have a material adverse impact on our borrowing base, which is primarily comprised of small and medium-sized merchants. For additional information, see "Note 11-Loans and Interest Receivable" in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
Customer support and operations
Customer support and operations expenses for the three months ended
[[Image Removed: pypl-20210331_g9.jpg]] Customer support and operations expenses increased by$119 million , or 30%, in the three months endedMarch 31, 2021 compared to the same period of the prior year due primarily to increases in employee-related expenses, customer onboarding and compliance costs, and contractors and consulting costs that support the growth of our active accounts and payment transactions. [[Image Removed: pypl-20210331_g2.jpg]] 48
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Sales and marketing
Sales and marketing expenses for the three months ended
[[Image Removed: pypl-20210331_g10.jpg]] Sales and marketing expenses increased by$231 million , or 62%, in the three months endedMarch 31, 2021 compared to the same period of the prior year due primarily to higher spending on marketing programs including the promotion of new product experiences, and to a lesser extent, employee-related expenses.
Technology and development
Technology and development expenses for the three months ended
[[Image Removed: pypl-20210331_g11.jpg]] Technology and development expenses increased by$136 million , or 22%, in the three months endedMarch 31, 2021 compared to the same period of the prior year due primarily to increases in employee-related expenses, costs related to contractors and consultants, and cloud computing services utilized in delivering our products. [[Image Removed: pypl-20210331_g2.jpg]] 49
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General and administrative
General and administrative expenses for the three months ended
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General and administrative expenses increased by
Restructuring and other charges
Restructuring and other charges for the three months ended
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Restructuring and other charges increased by
During the first quarter of 2020, management approved a strategic reduction of the existing global workforce as part of a multiphase process to reorganize our workforce concurrently with the redesign of our operating structure, which spanned multiple quarters. It resulted in restructuring charges of$32 million and$29 million during the three months endedMarch 31, 2021 and 2020, respectively. We primarily incurred employee severance and benefits costs, as well as other associated consulting costs under the 2020 strategic reduction, substantially all of which have been accrued as ofMarch 31, 2021 . For information on the associated restructuring liability, see "Note 17-Restructuring and Other Charges" in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
Additionally, in the first quarter of 2021, we incurred impairment charges of
Other income (expense), net
Other income (expense), net decreased$35 million , or 26%, in the three months endedMarch 31, 2021 compared to the same period of the prior year due primarily to incremental interest expense associated with our fixed rate notes issued in the second quarter of 2020 and a decline in interest income on corporate cash and investments driven by lower interest rates. [[Image Removed: pypl-20210331_g2.jpg]] 50
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Income tax (benefit) expense
Our effective income tax rate was approximately (26)% and 68% for the three months endedMarch 31, 2021 and 2020, respectively. The decrease in our effective income tax rate for the three months endedMarch 31, 2021 , compared to the same period of the prior year was due primarily to tax expense related to the intra-group transfer of intellectual property in the three months endedMarch 31, 2020 with no comparable activity in the current period, and an increase in tax benefits associated with discrete tax adjustments including stock-based compensation deductions.
LIQUIDITY AND CAPITAL RESOURCES
We require liquidity and access to capital to fund our global operations, including customer protection programs, our credit products, capital expenditures, investments in our business, potential acquisitions and strategic investments, working capital, and other cash needs. The following table summarizes our cash, cash equivalents, and investments as ofMarch 31, 2021 andDecember 31, 2020 :March 31, 2021 December 31, 2020 (In millions)
Cash, cash equivalents, and investments(1)(2)
15,852
(1) Excludes assets related to funds receivable and customer accounts of$35.6 billion and$33.4 billion atMarch 31, 2021 andDecember 31, 2020 , respectively. (2) Excludes total restricted cash of$26 million and$88 million atMarch 31, 2021 andDecember 31, 2020 , respectively, and strategic investments of$2.9 billion and$3.2 billion as ofMarch 31, 2021 andDecember 31, 2020 , respectively.
Foreign cash, cash equivalents, and investments
Cash, cash equivalents, and investments held by our foreign subsidiaries were$8.9 billion as ofMarch 31, 2021 and$7.0 billion atDecember 31, 2020 , or 55% and 44% of our total cash, cash equivalents, and investments as of those respective dates. AtDecember 31, 2020 , all of our cash, cash equivalents, and investments held by foreign subsidiaries were subject toU.S. taxation under Subpart F, Global Intangible Low Taxed Income ("GILTI"), or the one-time transition tax under the Tax Cuts and Jobs Act of 2017. Subsequent repatriations to theU.S. will not be taxable from aU.S. federal tax perspective but may be subject to state or foreign withholding tax. A significant aspect of our global cash management activities involves meeting our customers' requirements to access their cash while simultaneously meeting our regulatory financial ratio commitments in various jurisdictions. Our global cash balances are required not only to provide operational liquidity to our businesses, but also to support our global regulatory requirements across our regulated subsidiaries. As such, not all of our cash is available for general corporate purposes.
Available credit and debt
We maintain uncommitted credit facilities in various regions throughout the world with a borrowing capacity of approximately$80 million in the aggregate, where we can withdraw and utilize the funds at our discretion for general corporate purposes. As ofMarch 31, 2021 , the majority of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing. Other than as described above, there are no significant changes to the available credit and debt disclosed in our 2020 Form 10-K. For additional information, see "Note 12-Debt" in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q. We have a cash pooling arrangement with a financial institution for cash management purposes. The arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the financial institution ("Aggregate Cash Deposits"). The arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income under the arrangement. As ofMarch 31, 2021 , we had a total of$4.5 billion in cash withdrawals offsetting our$4.5 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement. [[Image Removed: pypl-20210331_g2.jpg]] 51
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Liquidity for loans receivable
Growth in our portfolio of loan receivables increases our liquidity needs and any inability to meet those liquidity needs could adversely affect our business. We continue to evaluate partnerships and third party sources of funding for our loans receivable portfolio. InJune 2018 , theLuxembourg Commission de Surveillance du Secteur Financier (the "CSSF") agreed thatPayPal 's management may designate up to 35% of European customer balances held in our Luxembourg banking subsidiary to be used for European andU.S. credit activities. During the three months endedMarch 31, 2021 , an additional$700 million was approved to fund such credit activities. As ofMarch 31, 2021 , the cumulative amount approved by management to be designated for credit activities aggregated to$2.7 billion and represented approximately 27% of European customer balances that have been made available for our corporate use at that date as determined by applying financial regulations maintained by the CSSF. We may periodically seek to designate additional amounts of customer balances, if necessary, based on utilization of the approved funds and anticipated credit funding requirements. While our objective is to expand the availability of our credit products with capital from external sources, there can be no assurance that we will be successful in achieving that goal. Under certain exceptional circumstances, corporate liquidity could be called upon to meet our obligations related to our European customer balances. Credit ratings As ofMarch 31, 2021 , we continue to be rated investment grade byStandard and Poor's Financial Services, LLC ,Fitch Ratings, Inc. , andMoody's Investors Services, Inc. We expect that these credit rating agencies will continue to monitor our performance, including our capital structure and results of operations. Our goal is to be rated investment grade, but as circumstances change, there are factors that could result in our credit ratings being downgraded or put on a watch list for possible downgrading. If that were to occur, it could increase our borrowing rates, including the interest rate on borrowings under our credit agreement.
Risk of loss
The risk of losses from our buyer and seller protection programs are specific to individual customers, merchants, and transactions, and may also be impacted by regional variations in, and changes or modifications to, the programs, including as a result of changes in regulatory requirements. For the periods presented in these condensed consolidated financial statements included in this report, our transaction loss rates ranged between 0.10% and 0.13% of TPV. Historical loss rates may not be indicative of future results. The duration and severity of the impacts of the COVID-19 pandemic remain unknown. Its negative impact on macroeconomic conditions could increase the risk of merchant bankruptcy, insolvency, business failure, or other business interruption, which may result in an adverse impact on our transaction losses, particularly for merchants that sell goods or services in advance of the date of their delivery or use.
Stock repurchases and acquisitions
During the three months endedMarch 31, 2021 , we repurchased approximately$1.3 billion of our common stock in the open market under our stock repurchase program authorized inJuly 2018 . As ofMarch 31, 2021 , a total of approximately$7.1 billion remained available for future repurchases of our common stock under ourJuly 2018 stock repurchase program.
Other considerations
In 2020, we announced our commitment to invest$535 million to support racial equality. As ofMarch 31, 2021 , we have deployed over$300 million of the committed funds through charitable contributions, grants to small businesses, internal investments to support and strengthen diversity and inclusion initiatives, and an economic opportunity fund focused on bolstering our relationships with community banks and credit unions serving underrepresented minority communities, as well as investing directly into black- and minority-led startups and minority-focused investment funds, among other initiatives. Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating, our financial performance, and global credit market conditions, as well as a broad range of other factors including those related to the COVID-19 pandemic discussed in this Form 10-Q. In addition, our liquidity, access to capital, and borrowing costs could also be negatively impacted by the outcome of any of the legal or regulatory proceedings to which we are a party. See Part I, Item 1A, Risk Factors in our 2020 Form 10-K, as supplemented and, to the extent inconsistent, superseded below in Part II, Item 1A, Risk Factors in this Form 10-Q, as well as "Note 13-Commitments and Contingencies" in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q for additional discussion of these and other risks that our business faces. [[Image Removed: pypl-20210331_g2.jpg]] 52
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We believe that our existing cash, cash equivalents, and investments, cash expected to be generated from operations, and our expected access to capital markets, together with potential external funding through third party sources, will be sufficient to fund our operating activities, anticipated capital expenditures, and our credit products for the foreseeable future. Depending on market conditions, we may from time to time issue debt, including in private or public offerings, to fund our operating activities, finance acquisitions, make strategic investments, repurchase shares under our stock repurchase program, or reduce our cost of capital. CASH FLOWS The following table summarizes our condensed consolidated statements of cash flows: Three Months Ended March 31, 2021 2020 (In millions) Net cash provided by (used in): Operating activities(1)$ 1,758 $ 1,421 Investing activities(1) (1,583) (2,554) Financing activities(1) 827 2,310
Effect of exchange rates on cash, cash equivalents, and restricted cash
(42) (178)
Net increase in cash, cash equivalents, and restricted cash $
960
(1) Prior period amounts have been revised to conform to the current period presentation. For additional information, see "Note 1-Overview and Summary of Significant Accounting Policies" in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
Operating activities
We generated cash from operating activities of$1.8 billion in the three months endedMarch 31, 2021 due primarily to operating income of$1.0 billion , as well as adjustments for non-cash expenses including: stock-based compensation of$368 million , depreciation and amortization of$300 million , and provision for transaction and credit losses of$273 million . Net income was also adjusted for net losses on our strategic investments of$120 million , changes in accounts receivable of$97 million , and changes in other assets and liabilities of$287 million , primarily related to actual cash transaction losses incurred during the period. We generated cash from operating activities of$1.4 billion in the three months endedMarch 31, 2020 due primarily to operating income of$398 million , as well as adjustments for non-cash expenses including: provision for transaction and credit losses of$591 million , depreciation and amortization of$293 million , and stock-based compensation of$283 million . Net income was also adjusted for net losses on our strategic investments of$124 million .
In the three months ended
Investing activities
The net cash used in investing activities of$1.6 billion in the three months endedMarch 31, 2021 was due primarily to purchases of investments of$11.0 billion , purchases of property and equipment of$221 million , and changes in funds receivable from customers of$180 million . These cash outflows were partially offset by maturities and sales of investments of$9.7 billion and changes in principal loans receivable, net of$75 million . The net cash used in investing activities of$2.6 billion in the three months endedMarch 31, 2020 was due primarily to acquisitions (net of cash acquired) of$3.6 billion , purchases of investments of$3.6 billion , changes in funds receivable from customers of$387 million , changes in principal loans receivable, net of$386 million , and purchases of property and equipment of$206 million . These cash outflows were partially offset by maturities and sales of investments of$5.5 billion and proceeds from the sale of property and equipment of$119 million . [[Image Removed: pypl-20210331_g2.jpg]] 53
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Financing activities
We generated cash from financing activities of$827 million in the three months endedMarch 31, 2021 due primarily to changes in funds payable and amounts due to customers of$3.0 billion , partially offset by the repurchase of$1.3 billion of our common stock under our stock repurchase program, and tax withholdings related to net share settlement of equity awards of$863 million . We generated cash from financing activities of$2.3 billion in the three months endedMarch 31, 2020 due primarily to proceeds from borrowings under our credit agreement of$3.0 billion and changes in funds payable and amounts due to customers of$526 million . These cash inflows were partially offset by the repurchase of$800 million of our common stock under our stock repurchase programs, and tax withholdings related to net share settlement of equity awards of$402 million .
Effect of exchange rates on cash, cash equivalents, and restricted cash
Foreign currency exchange rates had a negative impact of$42 million on cash, cash equivalents, and restricted cash for the three months endedMarch 31, 2021 due primarily to fluctuations in the exchange rate of theU.S. dollar to the Euro, Australian dollar, and Swedish krona. Foreign currency exchange rates had a negative impact of$178 million on cash, cash equivalents, and restricted cash for the three months endedMarch 31, 2020 , due to the strengthening of theU.S. dollar against certain foreign currencies, primarily the Australian dollar, and to a lesser extent, the Brazilian real.
OFF-BALANCE SHEET ARRANGEMENTS
As of
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