Loans and Interest Receivable

12 Months Ended

Dec. 31, 2019

We offer credit products to consumers and certain small and medium-sized merchants. We work with independent chartered financial institutions that extend credit to the consumer or merchant using our credit products in the U.S. For our consumer credit products outside the U.S., we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. and working capital loans in Germany through our Luxembourg banking subsidiary, and extend working capital loans in Australia through an Australian subsidiary. Prior to July 2018, we purchased receivables related to credit extended to U.S. consumers by independent chartered financial institutions and were responsible for servicing functions related to that portfolio. Following the completion of the sale of our U.S. consumer credit receivables portfolio to Synchrony in July 2018, we no longer purchased receivables related to the U.S. consumer loans, but remained responsible for the servicing functions related to the sold portfolio through a transition period which ended in the second quarter of 2019. We purchase receivables related to credit extended to U.S. merchants by an independent chartered financial institution and are responsible for servicing functions related to that portfolio. During the year ended December 31, 2019 and 2018, we purchased approximately $4.7 billion and $8.1 billion in credit receivables, respectively. The credit receivables purchased during the year ended December 31, 2018 included purchases associated with our U.S. consumer credit receivables portfolio, which was designated as held for sale in November 2017 until the completion of the sale to Synchrony in July 2018.

In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolio to Synchrony. 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. Upon approval by our Board of Directors to sell these receivables, the portfolio was reclassified as held for sale and recorded at the lower of cost or fair value, determined on an aggregate basis. For the year ended December 31, 2017, due to the designation as held for sale, the associated allowance for this portfolio was reversed, resulting in an increase of approximately $39 million in revenue from other value added services and a decrease of approximately $283 million in transaction and loan losses on our consolidated statements of income. In July 2018, we completed the sale of this portfolio to Synchrony, approximately at par, for total consideration of $6.9 billion, which includes cash consideration of $6.5 billion and a long-term note receivable in the amount of $426 million, which was recorded at its present value at the time of the completion of the sale in the amount of $261 million in other assets on our consolidated balance sheets. This amount is subject to accretion over the term of the arrangement, and is not reflected as a cash item on our consolidated statements of cash flows. The purchase price was subject to post-closing true-up and certain other adjustments under the terms of the purchase agreement. During the year ended December 31, 2018, additional expenses incurred due to this transaction resulted in a net loss of approximately $40 million recorded in restructuring and other expenses on our consolidated statements of income, and during the year ended December 31, 2019, we recorded a gain of $7 million representing an adjustment to the consideration exchanged in the sale. PayPal also earns a revenue share on the portfolio of consumer receivables owned by Synchrony, which includes both the sold and newly generated receivables. The 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.

Consumer Receivables

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

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

Consumer Receivables Delinquency and Allowance

The following tables present the delinquency status of the principal amount of consumer loans and interest receivable. The amounts shown below are based on the number of days past the billing date to the consumer. Current represents balances that are within 30 days of the billing date.



December 31, 2019
(In millions)
Current			30 - 59 Days			60 - 89 Days			90 - 180 Days			Total Past 30 days			Total
$	1,242		$	37		$	15		$	28		$	80		$	1,322
93.9		%	2.8		%	1.1		%	2.2		%	6.1		%	100		%



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

We charge off consumer loan receivable balances in the month in which a customer’s balance becomes 180 days past the payment due date. Bankrupt accounts are charged off within 90 days after receipt of notification of bankruptcy. Loans receivable past the payment due date continue to accrue interest until they are charged off. We record an allowance for loss against the interest receivable.

The following table summarizes the activity in the allowance for consumer loans and interest receivable for the years ended December 31, 2019 and 2018:



	December 31, 2019									December 31, 2018
	Consumer Loans Receivable			Interest Receivable			Total Allowance			Consumer Loans Receivable			Interest Receivable			Total Allowance⁽¹⁾
	(In millions)
Beginning Balance	$	27		$	3		$	30		$	57		$	6		$	63
Provisions	34			11			45			53			8			61
Charge-offs	(43		)	(6		)	(49		)	(104		)	(11		)	(115		)
Recoveries⁽²⁾	31			—			31			21			—			21
Ending Balance	$	49		$	8		$	57		$	27		$	3		$	30

⁽¹⁾Beginning balance includes approximately $50 million of U.S. consumer credit receivables that were fully reserved and have been charged off as of December 31, 2018.

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

The tables above exclude receivables from other consumer credit products of $92 million and $96 million at December 31, 2019 and 2018, respectively, and allowances of $10 million and $12 million at December 31, 2019 and 2018, respectively.

The provision for loan losses relating to our consumer loans receivable portfolio is recognized in transaction and loan losses. The provision for interest receivable due to interest earned on our consumer loans receivable portfolio is recognized in net revenues from other value added services as a reduction to revenue. Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable.

Merchant Receivables

We offer business financing solutions to certain small and medium-sized merchants through our PayPal Working Capital (“PPWC”) and PayPal Business Loan (“PPBL”) products. As of December 31, 2019 and 2018, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was $2.8 billion and $1.9 billion, respectively, net of the participation interest sold to an independent chartered financial institution of $124 million and $84 million, respectively. See “Note 1—Overview and Summary of Significant Accounting Policies” for additional information on this participation arrangement.

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

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

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

Merchant Receivables Delinquency and Allowance

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



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



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

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

The following table summarizes the activity in the allowance for merchant loans, advances, and interest and fees receivable, for the years ended December 31, 2019 and 2018:



	December 31, 2019									December 31, 2018
	Merchant Loans and Advances			Interest & Fees Receivable			Total Allowance			Merchant Loans and Advances			Interest & Fees Receivable			Total Allowance
	(In millions)
Beginning Balance	$	115		$	15		$	130		$	52		$	7		$	59
Provisions	240			26			266			162			20			182
Charge-offs	(201		)	(21		)	(222		)	(109		)	(12		)	(121		)
Recoveries	17			—			17			10			—			10
Ending Balance	$	171		$	20		$	191		$	115		$	15		$	130

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