Off-Balance Sheet Arrangements

As of June 30, 2016, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our combined and consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.


Item 3:	Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in market factors such as interest rates, foreign currency exchange rates and equity price risk. Management establishes and oversees the implementation of policies governing our investing, funding, and foreign currency derivative activities in order to mitigate market risks. We monitor risk exposures on an ongoing basis.

Interest Rate Risk

We are exposed to ~~interest rate~~interest-rate risk relating to our investment portfolio and from interest-rate sensitive assets underlying the customer balances we hold on our condensed ~~combined and~~ consolidated balance sheet as customer accounts. We seek to reduce earnings volatility that may result from changes in interest rates.

As of ~~September~~June 30, ~~2015~~2016 and December 31, ~~2014,~~2015, approximately ~~32%~~33% and ~~97%~~24% of our total cash and investment portfolio was held in cash and cash equivalents. The proportionate increase was primarily driven by an increase in cash and cash equivalents from the designation of $800 million of European customer balances held in our Luxembourg banking subsidiary to be used to extend credit to our European customers as approved by management and ~~we held no direct investments~~our Luxembourg banking subsidiary Supervisory Board in ~~auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.~~March 2016 and as permitted within regulations set forth by the CSSF. For additional details related to our investment activities, please see “Note 6—7—Investments” to the condensed combined and consolidated financial statements included in this report.

The assets underlying the customer balances we hold on our ~~combined and~~condensed consolidated balance sheet as customer accounts are maintained in interest and non-interest bearing bank deposits, time deposits, and U.S. and foreign government and agency securities. We classify the assets underlying the customer balances as current based on their purpose and availability to fulfill our direct obligation under amounts due to customers. We seek to preserve principal while holding eligible liquid assets, as defined by ~~the~~applicable regulatory requirements and commercial law in the jurisdictions where ~~PayPal operates,~~we operate, equal to at least 100% of the aggregate amount of all customer balances. We do not pay interest on amounts due to customers.

On July 17, 2015, we entered into a $2 billion senior unsecured credit facility maturing in 2020. Borrowings under the revolving facility, if any, bear interest at floating rates. As a result, we will be exposed to fluctuations in interest rates to the extent of our borrowings under the revolving credit facility. As of June 30, 2016, no borrowings or letters of credit were outstanding under the Credit Agreement.

Interest rates may also adversely impact our customers’ spending levels and ability and willingness to pay outstanding amounts owed to us. Higher interest rates often lead to higher payment obligations by customers to us and other lenders under mortgage, credit card and other consumer loans, which may reduce our customers’ ability to remain current on their obligations to us and therefore lead to increased delinquencies, charge-offs and allowance for loan and interest receivable, which could have an adverse effect on our net earnings.

A 100 basis point increase in interest rates would not have had a material impact on our financial assets or liabilities at ~~September~~June 30, ~~2015~~2016 and December 31, ~~2014.~~2015.

Foreign Currency Risk

We have significant operations internationally that are denominated in foreign currencies, primarily the ~~Euro,~~ British Pound, Euro, Australian Dollar and ~~Australian~~Canadian Dollar, subjecting us to foreign currency risk which may adversely impact our financial results. We transact business in various foreign currencies and have significant international revenues as well as costs. In addition, we charge our international subsidiaries for their use of intellectual property and technology and for certain corporate services. Our cash flow, results of operations and certain of our intercompany balances that are exposed to foreign exchange rate fluctuations may differ materially from expectations and we may record significant gains or losses due to foreign currency fluctuations and related hedging activities. We are generally a net receiver of foreign currencies and therefore benefit from a weakening of the U.S. dollar, and are adversely affected by a strengthening of the U.S. dollar, relative to foreign currencies.

We have a foreign exchange exposure management program designed to identify material foreign currency exposures, manage these exposures and reduce the potential effects of currency fluctuations on our reported condensed combined and consolidated cash flows and results of operations through the execution of foreign currency exchange contracts. These foreign currency exchange contracts are accounted for as derivative instruments; for additional details related to our foreign currency exchange contracts, please see “Note 8—9—Derivative Instruments” to the condensed combined and consolidated financial statements included in this report.

We use foreign exchange forward contracts to protect our forecasted U.S. dollar-equivalent earnings from adverse changes in foreign currency exchange rates. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse currency

exchange rate movements. We designate these contracts as cash flow hedges for accounting purposes. The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income ("AOCI") and subsequently reclassified into revenue in the same period the forecasted transaction affects earnings. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings.

We considered the historical trends in currency exchange rates and determined that it was reasonably possible that changes in exchange rates of 20% for all currencies could be experienced in the near term. If the U.S. dollar weakened by 20% at ~~September~~June 30, ~~2015~~2016 and December 31, ~~2014,~~2015, the amount recorded in AOCI related to our foreign exchange forward contracts, before taxes, would have been approximately ~~$227~~$349 million and ~~$294~~$321 million lower, respectively. If the U.S. dollar strengthened by 20% at ~~September~~June 30, ~~2015~~2016 and December 31, ~~2014,~~2015, the amount recorded in AOCI related to our foreign exchange forward contracts, before taxes, would have been approximately ~~$227~~$349 million and ~~$294~~$321 million higher, respectively.

~~In addition,~~We have an additional foreign exchange management program whereby we use foreign exchange contracts to offset the foreign exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of currency exchange rate movements on our assets and liabilities. The foreign currency gains and losses on ~~the~~our assets and liabilities are recorded in “Other income (expense), net,” which are offset by the gains and losses on the foreign exchange contracts.

~~We considered the historical trends in currency exchange rates and determined that it was reasonably possible that adverse~~Adverse changes in exchange rates of 20% for all currencies ~~could be experienced in the near term. These changes~~ would have resulted in an adverse impact on income before income taxes of approximately ~~$113~~$88 million and ~~$32~~$136 million at ~~September~~June 30, ~~2015~~2016 and December 31, ~~2014,~~2015, respectively, without considering the offsetting effect of hedging. Foreign exchange contracts in place as of ~~September~~June 30, 2016 would have positively impacted income before income taxes by approximately $88 million, resulting in a net positive impact of less than $1 million. Foreign exchange contracts in place as of December 31, 2015 would have positively impacted income before income taxes by approximately ~~$110~~$133 million, resulting in a net negative impact of approximately $3 million. Foreign exchange contracts in place as of December 31, 2014 would have positively impacted income before income taxes by approximately $34 million, resulting in a net positive impact of approximately $2 million. These reasonably possible adverse changes in exchange rates of 20% were applied to total monetary assets and liabilities denominated in currencies other than the functional currencies of our subsidiaries at the balance sheet dates to compute the adverse impact these changes would have had on our income before income taxes in the near term.

Equity Price Risk

As of ~~September~~June 30, ~~2015~~2016 and December 31, ~~2014,~~2015, our cost ~~and equity~~ method investments totaled ~~$26~~$50 million and ~~$31~~$26 million, respectively, which represented less than 1% of our total cash and investment portfolio and were primarily related to ~~equity~~cost method investments in privately held companies. We did not hold any marketable equity instruments. We review our investments for impairment when events and circumstances indicate a decline in fair value of such assets below carrying value is other-than-temporary. Our analysis includes a review of recent operating results and trends, recent sales and acquisitions of the securities in which we have invested and other publicly available data.

European Debt Exposures

We actively monitor our exposure to the European markets, including the impact of sovereign debt issues associated with Cyprus, Greece, Ireland, Italy, Portugal and Spain. As of ~~September~~June 30, ~~2015~~2016 and December 31, ~~2014,~~2015, we did not have any direct investments in the sovereign debt of these countries or in debt securities issued by corporations or financial institutions organized in these countries. We maintain a small number of operating bank accounts with local and foreign banks in the aforementioned countries that have balances that we do not consider material.


Item 4:	Controls and Procedures

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

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

PART II: OTHER INFORMATION


Item 1:	Legal Proceedings

The information set forth under “Note ~~10 —~~11- Commitments and Contingencies, — Litigation and Regulatory Matters” to the condensed combined and consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference.


Item 1A:	Risk Factors

~~The following discussion is divided into three sections. The first section,~~We are subject to various risks and uncertainties, which ~~begins immediately following this paragraph, discusses some of the risks that may~~could materially affect our business, results of operations, financial condition, and ~~financial condition.~~future results and the trading price of our common stock. You should carefully read the following information together with the information appearing in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2015. The ~~second section, captioned “Risks Related~~following information supplements and, to the ~~Separation and Our Operation as an Independent Publicly Traded Company,” discusses~~extent inconsistent, supersedes some of the ~~risks relating to~~information appearing in the Risk Factors section of our separation into an independent publicly traded company. The third section, captioned “Risks Related to Our Common Stock,” discusses some of the risks relating to an investment in our Common Stock. You should carefully review all of these sections,Annual Report on Form 10-K. These risk factors, as well as our condensed combined and consolidated financial statements and notes thereto and the other information appearing in this report, should be reviewed carefully for important information regarding risks that affect us.

~~Risk Factors That May Affect Our Business, Results of Operations and Financial Condition~~

Our operating and financial results come primarily from transactions involving payments made in a reporting period and are therefore subject to fluctuations that could adversely affect our business, financial condition, results of operations and cash flows, as well as the trading price of our common stock.

Our operating and financial results have varied on a quarterly basis during our operating history and may continue to fluctuate significantly as a result of a variety of factors, including as a result of the risks set forth in this “Risk Factors” section. It is difficult for us to forecast the level or source of our revenues or earnings (loss) accurately. In view of the rapidly evolving nature of our business, period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon them as an indication of future performance. We do not have backlog, and substantially all of our net revenues each quarter come primarily from transactions involving payments during that quarter. Due to the inherent difficulty in forecasting revenues, it is also difficult to forecast expenses as a percentage of net revenues. Quarterly and annual expenses as a percentage of net revenues reflected in our financial statements may be significantly different from historical or projected rates. Our operating results in one or more future quarters may fall below the expectations of securities analysts and investors. The trading price of our common stock could decline, perhaps substantially, as a result of the factors described in this paragraph.

~~Global and regional economic conditions could harm our business.~~

Our operations and performance depend significantly on global and regional economic conditions. Adverse economic conditions and events (including volatility or distress in the equity and/or debt or credit markets and fluctuations in foreign currency exchange rates) have negatively impacted regional and global financial markets in the past and will likely continue to do so from time to time in the future. These events and conditions could have a negative and adverse impact on the companies and customers with which we do business. In addition, financial turmoil affecting the banking system or financial markets could cause additional consolidation of the financial services industry, significant financial service institution failures, new or incremental tightening in the credit markets, low liquidity, and extreme volatility in fixed income, credit, currency, and equity markets. Adverse impacts to the companies and customers with which we do business, the banking system, or financial markets could have a material adverse effect on our business, including a reduction in the volume and prices of transactions on our payments platforms.

~~Our success depends to a large degree on our ability to successfully address rapidly evolving markets for transactions on mobile devices.~~

Mobile devices are increasingly used for ecommerce transactions and payments. A significant and growing portion of our customers access our Payments Platform through mobile devices. We may lose customers if we are not able to continue to meet our customers’ mobile and multi-screen experience expectations. The variety of technical and other configurations across different mobile devices and platforms increases the challenges associated with this environment. In addition, a number of other companies with significant resources and a number of innovative startups have introduced products and services focusing on mobile markets.

Our ability to successfully address the challenges posed by the rapidly evolving market for mobile transactions is crucial to our continued success, and any failure to continue to increase the volume of mobile transactions effected through our Payments Platform could harm our business.

~~If we cannot keep pace with rapid technological developments to provide new and innovative programs, products and services, the use of our products and our revenues could decline.~~

Rapid, significant technological changes continue to confront the industries in which we operate, including developments in payment card tokenization, ecommerce, mobile, virtual currencies and near field communication and other proximity payment devices, such as contactless payments. We cannot predict the effects of technological changes on our business. In addition to our own initiatives and innovations, we rely in part on third parties, including some of our competitors, for the development of and access to new technologies. We expect that new services and technologies applicable to the industries in which we operate will continue to emerge. These new services and technologies may be superior to, or render obsolete, the technologies we currently use in our products and services. Developing and incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and ultimately may not be successful. In addition, our ability to adopt new services and develop new technologies may be inhibited by industry-wide standards, payments networks, new laws and regulations, resistance to change from consumers or merchants, or third-party intellectual property rights. Our success will depend on our ability to develop and incorporate new technologies and adapt to technological changes and evolving industry standards; if we are unable to do so in a timely or cost-effective manner, our business could be harmed.

Changes in how consumers fund their PayPal transactions could harm our business.

We pay significant transaction fees when consumers fund payment transactions using credit cards, lower fees when consumers fund payments with debit cards, nominal fees when consumers fund payment transactions by electronic transfer of funds from bank accounts, and nominal fees when consumers fund payment transactions from an existing PayPal account balance or through our PayPal Credit products. Our financial success is ~~highly~~ sensitive to changes in the rate at which our consumers fund payments using credit and debit cards (collectively, “payment cards”), which can significantly increase our costs. ~~Some~~Despite our efforts to provide consumers with the opportunity to use their existing PayPal account balance to fund payment transactions, some of our consumers may prefer to use ~~credit and debit~~payment cards, especially if these payment cards offer functionality and benefits not associated with the use of their bank accounts. Some of our offerings, including the ability of consumers to make a limited number of “guest” payments without opening a PayPal account, have a higher rate of payment card funding than our basic product offering. An increase in the portion of our payment volume funded using ~~credit and debit~~payment cards ~~would~~or in fees associated with our funding mix, or other events or developments that make it more difficult or costly for us to fund transactions by electronic transfer of funds from bank accounts or existing PayPal account balances, could materially and adversely affect our financial ~~performance.~~performance and significantly harm our business. Some of our plans to lower our funding costs, including our PayPal Credit products and enabling consumers to defer payment for a short period of time on some transactions, may increase the risk to us of nonpayment by consumers. An

Negotiated arrangements with payment card networks and/or issuing banks, promoting greater choice and options for consumers to fund payment transactions could have an uncertain impact on our business. We recently announced that we have entered into a strategic partnership with Visa, Inc. ("Visa") to further expand our relationship with Visa in a way that will make it easier for merchants and consumers to choose to pay with Visa credit and debit cards. As part of the agreement, we will gain access to Visa’s tokenization services in the U.S. for in-store point-of-sale PayPal transactions. While we anticipate that this strategic partnership will result in an increase in ~~fees~~the number of transactions and transaction volume that we process, we also anticipate that a greater percentage of customer transactions will be executed using a credit or debit card, which could increase our funding costs. If our transaction volume does not increase as expected, our business and results of operations could be adversely affected due to increased costs associated with our funding ~~mix or in losses associated with nonpayment by consumers could harm our business.~~

~~Our business is subject to online security risks, including security and privacy breaches.~~mix.

Our business involves the collection, storage, processing and transmission of customers’ personal data including financial information. In addition, a significant number of our customers authorize us to bill their payment card accounts directly for all transaction and other fees charged by us. We have built our reputation on the premise that our payments platforms offer customers a secure way to make payments. An increasing number of organizations, including large on-line and off-line merchants and businesses, other large Internet companies, financial institutions, and government institutions, have disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks, including on portions of their websites or infrastructure. In May 2014, eBay Inc. publicly announced that criminals were able to penetrate and steal certain data, including user names, encrypted user passwords and other non-financial user data, from certain of its Marketplaces business unit databases, which led to Marketplaces requiring a password reset and fewer transactions using our PayPal services. A breach of security or privacy at PayPal could have negative consequences to our reputation, which could result in our customers discontinuing or reducing their use of our products, and could have significant out-of-pocket financial impact, which could harm our business. Similarly, a breach of security or privacy at our customers could result in a reduction in transactions on our Payments Platform.

The techniques used to obtain unauthorized, improper or illegal access, disable or degrade service, or sabotage systems change frequently, may be difficult to detect quickly, and often are not recognized until launched against a target. Certain efforts may be state-sponsored and supported by significant financial and technological resources and may therefore be even more difficult to detect. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. Unauthorized parties also may attempt to gain access to our systems or facilities through various means, including hacking into our systems or facilities, fraud, trickery or other means of deceiving our employees, contractors and temporary staff. A party that is able to circumvent our security measures could misappropriate our, our customers’ or our employees’ personal or proprietary information,

cause interruption in our operations and damage our computers and systems or those of our customers. In addition, our customers have been and likely will continue to be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate user names, passwords, payment card numbers, or other personal information or to introduce viruses or other malware, including through “trojan horse” programs, to our customers’ computers. Also, our information technology and infrastructure may be vulnerable to cyberattacks or security incidents, and third parties may be able to access our customers’ personal or proprietary information and payment card data that are stored on or accessible through our systems. Any security or privacy breach at a company providing services to us or our customers, or integrated with PayPal products and services, could have similar effects. Because we promote to our customers that our Payments Platform offer secure ways to make payments, a security or privacy breach could have a significant impact on our reputation.

In addition, under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, or that is stored by our direct payment card processing customers, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. If we are unable to accept payment cards, our business would be harmed. Additionally, financial services regulators in various jurisdictions, including the United States and the European Union, have implemented or are considering proposals to impose new authentication requirements on banks and payment processors intended to reduce online fraud, which could impose significant costs, require us to change our business practices, make it more difficult for new customers to join PayPal, and reduce the ease of use of our products, which could harm our business.

We may also need to expend significant additional resources to protect against security or privacy breaches or to redress problems caused by breaches. These issues are likely to become more difficult and costly as we expand the number of markets where we operate. Additionally, our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches, and we may not be able to collect fully, if at all, under these insurance policies.

~~Systems failures and resulting interruptions in the availability of our websites, applications, products or services could harm our business.~~

Our systems may experience service interruptions or degradation because of hardware and software defects or malfunctions, computer denial-of-service and other cyberattacks, human error, earthquakes, hurricanes, floods, fires, natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses or other malware, or other events. Our systems also may be subject to break-ins, sabotage and intentional acts of vandalism. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities. In addition, as a provider of payments solutions, we are subject to increased scrutiny by regulators that may require specific business continuity, resiliency and disaster recovery plans and more rigorous testing of such plans. This increased scrutiny may be costly and time-consuming and may divert our resources from other business priorities.

We have experienced and will likely continue to experience system failures, denial of service attacks and other events or conditions from time to time that interrupt the availability or reduce or affect the speed or functionality of our products and services. These events have resulted and likely will result in loss of revenue. A prolonged interruption in the availability or reduction in the availability, speed or other functionality of our products and services could materially harm our business. Frequent or persistent interruptions in our services could cause current or potential customers to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our products and services, and could permanently harm our reputation and brands. Moreover, to the extent that any system failure or similar event results in damages to our customers or their businesses, these customers could seek significant compensation or contractual penalties from us for their losses and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address.

Our Payments Platform has suffered significant intermittent unavailability, including for example, transaction failures which affected some customers in the United Kingdom for more than 24 hours in August 2014 and mobile login failures which affected some customers for several hours in April 2014. Reliability is particularly critical for us because the full-time availability of our PayPal products and services is critical to our goal of gaining widespread acceptance among consumers and merchants for digital and mobile payments. We have undertaken certain system upgrades and re-platforming efforts designed to improve our reliability and speed. These efforts are costly and time-consuming, involve significant technical risk and may divert our resources from new features and products, and there can be no guarantee that these efforts will succeed. Because we are a regulated financial institution in certain jurisdictions, frequent or persistent site interruptions could lead to regulatory scrutiny, significant fines and penalties, or mandatory and costly changes to our business practices, and ultimately could cause us to lose existing licenses that we need to operate or prevent us from obtaining additional licenses that we need to expand our business.

We also rely on facilities, components and services supplied by third parties, including eBay, and our business may be materially adversely affected to the extent these components or services do not meet our expectations or these third parties cease

to provide the services or facilities. We do not carry business interruption insurance sufficient to compensate us for all losses that may result from interruptions in our service as a result of systems failures and similar events.

Changes to payment card networks or bank fees, rules, or practices could harm our business.

We do not directly access the payment card networks, such as Visa and MasterCard, that enable our acceptance of credit cards and debit cards, ~~(including~~including some types of prepaid ~~cards).~~cards. Accordingly, we must rely on banks or other payment processors to process transactions and must pay fees for the services. From time to time, payment card networks have increased, and may increase in the future, the interchange fees and assessments that they charge for each transaction which accesses their networks. Payment card networks have or may impose special assessments for transactions that are executed through a “digital wallet” such as PayPal’s, and such fees could particularly impact us and significantly increase our costs. Our payment card processors may have the right to pass any increases in interchange fees and assessments on to us as well as increase their own fees for processing. Any changes in interchange fees and assessments could increase our operating costs and reduce our operating income. We recently announced that we have entered into a strategic partnership with Visa, Inc. to further expand our relationship with Visa in a way that will make it easier for merchants and consumers to choose to pay with Visa credit and debit cards. During the term of the agreement,

Visa has agreed to not enact or impose any fees or rules solely targeted at PayPal. Upon termination of the agreement, PayPal could become subject to special digital wallet fees or other special assessments.

In addition, in some jurisdictions, governments have required Visa and MasterCard to reduce interchange fees, or have opened investigations as to whether Visa’s or MasterCard’s interchange fees and practices violate antitrust law. In the United States, the Federal Reserve Board issued a final rule capping debit card interchange fees at significantly lower rates than Visa or MasterCard previously charged. In the European Union, the Multilateral Interchange Fee ~~(“MIF”)~~ Regulation limits credit and debit interchange fees for payments ~~to 0.3% and 0.2%, respectively,~~ and imposes business rules on card processing services. Any material reduction in credit or debit card interchange rates in the United States or other markets could adversely affect our competitive position against traditional credit and debit card service providers, and may subject us to pricing pressure, although it would also lower our costs. Future changes to those regulations ~~or to our business~~ could potentially adversely affect our business.

We are required by our processors to comply with payment card network operating rules, including special operating rules for payment service providers to merchants, and we have agreed to reimburse our processors for any fines they are assessed by payment card networks as a result of any rule violations by us or our merchants. The payment card networks set and interpret the card operating rules. From time to time, the networks have alleged that various aspects of our business model violate these operating rules. If such allegations are not resolved favorably, they may result in material fines and penalties or require changes in our business practices that may be costly. The payment card networks could adopt new operating rules or interpret or re-interpret existing rules that we or our processors might find difficult or even impossible to follow, or costly to implement. As a result, we could lose our ability to give consumers the option of using payment cards to fund their payments or the choice of currency in which they would like their payment card to be charged. If we ~~were~~are unable to accept payment cards or ~~were~~are meaningfully limited in our ability to do so, our business would be ~~harmed.~~

adversely affected.

We and our payment card processors have implemented specific business processes for merchants to comply with payment card network operating rules for providing services to merchants. Any failure to comply with these rules could result in fines. We are also ~~could be, and in the past have been,~~ subject to fines from payment card networks if we fail to detect that merchants are engaging in activities that are illegal or that are considered “high risk,” primarily the sale of certain types of digital content. For “high risk” merchants, we must either prevent such merchants from using our PayPal services or register such merchants with the payment card networks and conduct additional monitoring with respect to such merchants. Although the amount of these fines has not been material to date, additional fines in the future could become material and could result in a termination of our ability to accept payment cards or require changes in our process for registering new ~~customers. This~~customers, which would ~~significantly damage~~materially harm our business. Payment card network rules may also increase the cost of, impose restrictions on, or otherwise negatively impact the development of, our retail point-of-sale solutions, ~~including our PayPal Here product,~~ which may ~~increase the costs of those products or otherwise~~ negatively impact their ~~deployment.~~deployment and adoption.

Failure to deal effectively with fraud, fictitious transactions, bad transactions, and negative customer experiences would increase our loss rate and harm our business, and could severely diminish merchant and consumer confidence in and use of our services.

We incur substantial losses due to claims from consumers that merchants have not performed or that their goods or services do not match the merchant’s description. We seek to recover such losses from the merchant, but may not be able to recover in full if the merchant is unwilling or unable to pay. In addition, in the event of the bankruptcy or other business interruption of a merchant that sells goods or services in advance of the date of their delivery or use (e.g., airline, cruise or concert tickets, custom-made goods and subscriptions), we could be liable to the buyers of such goods or services, either through our buyer protection program or through chargebacks on payment cards used by customers to fund their payment. While we have established reserves based on assumptions and estimates that we believe are reasonable to cover such eventualities, these reserves may be insufficient.

We also incur losses from claims that the consumer did not authorize the purchase, from consumer fraud, from erroneous transmissions and from customers who have closed bank accounts or have insufficient funds in them to satisfy payments. In addition, if losses incurred by us related to payment card transactions become excessive, they could potentially result in our losing the right to accept payment cards for ~~payment. In the event that we were unable to accept~~ payment, ~~cards, the number of transactions processed through~~which would harm our PayPal services would decrease substantially and our business would be harmed. Our PayPal Credit products are similarly subject to the risk of fraudulent activity associated with merchants, consumers of PayPal Credit products and third parties handling our customer information.business. We have taken measures to detect and reduce the

risk of fraud, but these measures need to be continually improved and may not be effective against new and continually evolving forms of fraud or in connection with new product offerings. If these measures do not succeed, our business could be harmed.

The United Kingdom’s departure from the European Union could adversely affect us.

~~Any factors that reduce cross-border~~The United Kingdom (U.K.) held a referendum on June 23, 2016 in which a majority of voters approved an exit from the European Union (EU) (“Brexit”). Negotiations are expected to commence to determine the future terms of the U.K.’s relationship with the EU, including, among other things, the terms of trade between the U.K. and the EU. The effects of Brexit will depend on any agreements the U.K. reaches to retain access to EU markets either during a transitional period or ~~make such trade~~ more ~~difficult could harm our business.~~permanently. The outcome

~~Cross-border trade~~of this referendum caused volatility in global stock markets and foreign currency exchange rate fluctuations and may continue to do so in the future. Brexit could adversely affect U.K., regional (including European) and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the British Pound and euro, which in turn could adversely affect the companies and customers with which we do business, particularly in the U.K. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which EU laws to replace or replicate. In particular, depending on the terms of Brexit, we may face new regulatory costs and challenges, including the following:

we could lose our ability for our EU operations to passport into the U.K. market through the banking license of PayPal (Europe) S.à r.l. et Cie, SCA (“PayPal (Europe)”), our wholly-owned subsidiary that is ~~an important source~~licensed and subject to regulation as a bank in Luxembourg;

we could be required to obtain additional regulatory licensing to operate in the U.K. market, adding costs and potential inconsistency to our business;

we could lose our ability to rely on Luxembourg as our lead regulatory authority for certain aspects of our ~~revenue~~U.K. operations; and ~~profits. For~~

we could also be required to comply with regulatory requirements in the ~~year ended December 31, 2014, approximately 24%~~U.K. that are in addition to, or inconsistent with, the regulatory requirements of ~~total payment volume (“TPV”) involved cross-border trade (i.e., transactions where~~ the merchant and consumer were in different countries). Cross-border transactions generally provide higher revenues and operating income than similar transactions that take place within a single country or market. Cross-border trade also represents our primary (or in some cases, only) presence in certain important markets, such as China.EU.

~~Cross-border trade is subject to,~~Any of these effects of Brexit and ~~may be impacted by, foreign exchange rate fluctuations. In addition, the potential interpretation~~others we cannot anticipate could adversely affect our business, results of operations, financial condition and application of laws of multiple jurisdictions (e.g., the jurisdiction of the merchant and othe consumer) are often extremely complicated in the context of cross-border trade. The interpretation and/or application of such laws could impose restrictions on cross-border trade. Any factors that increase the costs of cross-border trade or restrict, delay, or make cross-border trade more difficult or impractical would lower our revenues and profits and could harm our business.cash flows.

Our business is subject to extensive government regulation and oversight, ~~relating to the provision of financial services.~~as well as extensive, complex, overlapping and frequently changing rules, regulations and legal interpretations.

~~We are~~Our business is subject to ~~various~~extensive government regulation and oversight. For a discussion of how government regulation impacts key aspects of our business, please see Item I - “Business—Government Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2015. Our business is also subject to laws, rules, regulations, policies and ~~regulations~~legal interpretations in the ~~United States and other countries where~~markets in which we ~~operate. Such laws, rules and regulations include~~operate, including (but not limited to) those governing banking, credit, deposit taking, cross-border and domestic money transmission, foreign exchange, privacy, data protection, banking secrecy, ~~and~~ payment services ~~such as~~(including payment processing and settlement ~~services.~~services), consumer protection, anti-money laundering, and counter-terrorist financing. The legal and regulatory requirements ~~that apply~~applicable to us ~~vary~~are extensive, complex, frequently changing, and increasing in number, and may impose overlapping and/or conflicting requirements or obligations.

Financial and political events have increased the level of regulatory scrutiny on the payments industry, and regulatory agencies may view matters or interpret laws and regulations differently than they have in the ~~markets where we operate~~past and ~~have~~in a manner adverse to our business. Our success and increased ~~over time as the geographical scope~~visibility may result in increased regulatory oversight and ~~complexity~~tighter enforcement of ~~our business and products have expanded. While we have a compliance program focused on compliance with applicable laws,~~ rules and regulations that may apply to our business.

As we expand and ~~have increased~~localize our international activities, we are increasingly becoming obligated to comply with the ~~resources allocated~~laws of the countries or markets in which we operate. In addition, because our services are accessible worldwide and we facilitate sales of goods and provide services to customers worldwide, one or more jurisdictions may claim that ~~program~~we or our customers are required to comply with their laws. Laws regulating the Internet, mobile and related technologies outside of the United States often impose different, more specific, or even conflicting obligations on us , as well as broader liability. For example, certain transactions that may be permissible in a local jurisdiction may be prohibited by regulations of U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) or U.S. anti-money laundering or counter-terrorist financing regulations.

Any failure or perceived failure to comply with existing or new laws and regulations (including changes to or expansion of the ~~last several years, we~~interpretation of those laws and regulations), including those discussed in this risk factor, may ~~still be~~ subject us to significant fines, orpenalties, criminal and civil lawsuits, forfeiture of significant assets, and other enforcement actions in one or more ~~jurisdictions or be required~~jurisdictions; result in additional compliance and licensure requirements; increase regulatory scrutiny of our business; restrict our operations; force us to ~~make changes to~~change our business practices, make product or ~~compliance programs~~operational changes or delay planned product launches or improvements. The foregoing could, individually or in the ~~future. Non-compliance could also~~aggregate, expose us to significant liability, impose significant costs, require us to expend substantial resources, increase the cost and complexity of compliance, damage our brand and business, make our products and services less attractive, result in ~~significant criminal and civil lawsuits, penalties, forfeiture~~the loss of ~~significant assets, or other enforcement actions. Costs associated with fines, enforcement actions, as well as reputational harm, changes in compliance requirements or limits on~~customers, limit our ability to ~~expand~~grow the business, adversely affect our ~~product offerings could~~results of operations, and harm our ~~business.~~reputation. The complexity of U.S. federal and state regulatory and enforcement regimes, coupled with the global scope of our operations and the evolving global regulatory environment, could result in a single event giving rise to a large number of overlapping investigations and legal and regulatory proceedings by multiple government authorities in different jurisdictions. We have implemented policies and procedures designed to help ensure compliance with applicable laws, and regulations, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations.

Payments Regulation

In the ~~United States,~~U.S., PayPal, Inc. has obtained licenses to operate as a money transmitter (or its equivalent) in the states where it is required, as well as in the District of Columbia, the U.S. Virgin Islands and Puerto Rico. These licenses include not only the PayPal branded products and services in these states, but also our Venmo branded products and services. Our subsidiary, ~~Venmo,~~Xoom, is also licensed as a money transmitter in certain U.S. ~~states, and acts as an authorized delegate and agent of PayPal in the states where Venmo is not directly licensed.~~states. As licensed money transmitters, PayPal and ~~Venmo~~Xoom are subject to restrictions with respect to their investment of customer funds, reporting requirements, bonding requirements and inspection by state regulatory agencies. Accordingly, if we violate these laws or regulations, we could be subject to liability and/or additional restrictions, forced to cease doing business with residents of certain states, forced to change our business practices or be required to obtain additional licenses or regulatory approvals that could impose substantial costs.

While we currently allow our ~~consumers~~customers with credit cards to send payments from approximately 200 markets, we allow customers in only approximately half of those markets (including the ~~United States)~~U.S.) to also receive payments, in some cases with significant restrictions on the manner in which customers can withdraw funds. These limitations may affect our ability to grow our business in these markets. Of the markets whose residents can use our PayPal services, ~~approximately~~almost 30 ~~markets~~of them are in member states of the European Union. We provide our services to customers in the European Union through PayPal (Europe) S.à r.l. et Cie, SCA (“PayPal (Europe)”), our wholly-owned subsidiary that is licensed and subject to regulation as a bank in Luxembourg. Accordingly, PayPal (Europe) is subject to significant fines or other enforcement action if it violates the disclosure, reporting, anti-money-laundering, capitalization, fund management, corporate governance, privacy, data protection, information security, banking secrecy, taxation, sanctions, or other requirements imposed on Luxembourg banks. ~~Any fines or other enforcement action could adversely affect our business.~~ In addition, European Union laws and regulations are typically subject to different and potentially inconsistent interpretations by the countries that are members of the European Union, which can make compliance more costly and operationally difficult to manage.

In Australia, we serve our customers through PayPal Australia Pty. Ltd. (“PayPal Australia”), which is licensed by the Australian Securities and Investments Commission as a provider of a non-cash payment product and by the Australian Prudential Regulation Authority as a purchased payment facility provider, which is a type of authorized depository institution. Accordingly, PayPal Australia ~~would be~~is subject to significant fines or other enforcement action if it violates the product disclosure, reporting, anti-money laundering, ~~capitalization,~~capital requirements, privacy, corporate governance or other requirements imposed on Australian depository institutions.

In many of the other markets ~~such as~~ in ~~much of Asia and South America,~~which we do business, we serve our customers through PayPal Pte. Ltd., our wholly-owned subsidiary that is based in Singapore. PayPal Pte. Ltd. is supervised by the Monetary Authority of Singapore and is designated as a holder of a stored value facility and does not hold a remittance license. As a result, PayPal Pte. Ltd. is not able to offer outbound remittance payments (including donations to charities) from Singapore, and can only offer payments for the purchase of goods and services in Singapore. In many of the markets (other than Singapore) served by PayPal Pte. Ltd., it is unclear and uncertain whether our Singapore-based service is subject only to Singapore law or, if it is subject to the application of local laws, whether such local laws would require a payment processor like us to be licensed as a payments service, bank, financial institution or otherwise.

We are also subject to regulation in other markets in which we do business and we have been and expect to continue to be required to apply for various licenses, certifications and regulatory approvals in a number of the countries where we provide our services. There can be no assurance that we will be able to obtain any such licenses. Even if we were able to obtain such licenses, there are substantial costs and potential product changes involved in maintaining such licenses, and we could be subject to fines or other enforcement action if we are found to violate disclosure, reporting, anti-money laundering, capitalization, corporate governance or other requirements of such licenses. These factors could impose substantial additional costs and involve considerable delay to the development or provision of our products or services, or could require significant and costly operational changes or prevent us from providing any products or services in ~~certain countries.~~

a given market.

In many other countries it may not be clear whether we are required to be licensed as a payment services provider, bank, financial institution or otherwise. In such markets, we may rely on local banks to process payments and conduct foreign exchange in local currency. Local regulators may use their power to slow or halt payments to local merchants conducted through the local ~~bank.~~bank or otherwise prohibit us from doing business in a country. Such regulatory actions or the need to obtain licenses, certifications or other regulatory approvals could impose substantial costs, ~~and~~ involve considerable delay to the provision or development of our services in, ~~a given market,~~ or could require significant and costly operational changes or prevent us from providing any products or services in a given market. For example, in June 2016, we suspended our operations in Turkey following cease and desist instructions from Turkey’s regulatory body, Bankacýlýk Düzenleme Ve Denetleme Kurumu (BDDK), following the BDDK’s rejection of our application for an e-money payments license.

~~We are subject to consumer protection laws and regulations.~~Consumer Protection

We are subject to consumer protection laws and regulations in the ~~United States and the other~~ countries in which we operate. ~~We are focused on compliance with these laws~~The financial services sector has been increasingly subject to regulatory scrutiny. In the U.S., we have been, and ~~regulations~~we expect that we will continue to be, required to make additional disclosures to our consumers and ~~have programs designed~~ to comply with new restrictions and existing consumer protection requirements. However, any errors, failures, or delays in complying with such consumer protection laws and regulations could result in significant criminal and civil lawsuits, penalties, forfeiture of significant assets, or other enforcement actions, as well as reputational harm. Any new consumer protection laws and regulations (or changes to, or expansion of, the interpretation or application of existing laws and regulations) applicable to us could subject us to additional restrictionsrequirements on our operations, additional compliance and licensure requirements, and increased regulatory scrutiny, which could force us to change our business practices or limit our ability to grow our business. Costs associated with fines or enforcement actions, changes in compliance requirements, or limitations on our ability to grow our business, could have an adverse effect on our financial results and harm our business.

~~Although there have been no definitive interpretations to date, we believe~~activities. Among other things, our services are subject to the Electronic Fund Transfer Act and Regulation E issued by the Consumer Financial Protection Bureau (“CFPB”). Under such regulations, among other things, we are required to provide advance disclosure of changes to our services, to follow specified error resolution procedures and to reimburse consumers for losses from certain transactions not authorized by the consumer. Additionally, even technical violations of these laws can result in assessment of actual damages or statutory damages or penalties of up to $1,000 in individual cases or up to $500,000 per violation in any class action and treble damages in some instances, and we could also be liable for plaintiffs’ attorneys’ fees. We are subject to, and have paid amounts in settlement of, lawsuits containing allegations that our business violated the Electronic Fund Transfer Act and Regulation E or otherwise advance claims for relief relating to our business practices (e.g., that we improperly held consumer funds or otherwise improperly limited consumer accounts). A determination that there have been violations of the Electronic Fund Transfer Act, Regulation E or violations of other laws relating to our business practices could expose us to significant liability. Any changes to our business practices resulting from these lawsuits could require us to incur significant costs and to expend substantial resources, which could delay other planned product launches or improvements and further harm our business.

~~The financial services sector has been increasingly subject to regulatory scrutiny. For example, in~~In January 2012, the CFPB finalized rules under Regulation E, mandated by the Dodd-Frank Act, which required us, beginning in October 2013, to provide additional disclosures, error resolution rights, and cancellation rights to U.S. consumers who make international remittance payments. In November 2014, the CFPB proposed a new prepaid account rule that would apply to prepaid cards, mobile wallets and potentially PayPal accounts. In December 2014, we became subject to CFPB supervision and examination pursuant to a new regulation that allows the CFPB to supervise all companies, including PayPal, that provide more than one million international remittance transfers per year. Under the regulation, CFPB examiners are now able to examine us for compliance with the remittance

transfer rule and other laws and regulations. These and other rules promulgated by the CFPB could increase our costs and require us to expend substantial resources and make changes to our business ~~practices, including how soon~~practices.

In May 2015, we ~~could offer new customers credit products. For other matters relating to regulation by~~entered into a Stipulated Final Judgment and Consent Order ("Consent Order") with the CFPB ~~please see “Note 10: Commitments~~in which we settled regulatory claims arising from PayPal Credit practices between 2011 and ~~Contingencies - Litigation~~2015. The Consent Order included obligations on PayPal to pay $15 million in redress to consumers and ~~Regulatory Matters.”~~

a $10 million civil monetary penalty, and required PayPal to make various changes to the PayPal Credit disclosures and related business practices. We continue to cooperate and engage with the CFPB and work to ensure compliance with the Consent Order, which may result in us incurring additional costs associated with compliance or redress.

PayPal (Europe) offers its services in European Union countries through a “passport” notification process through the Luxembourg regulator to regulators in other European Union member states pursuant to European Union Directives, and has completed the “passport” notification process in all European Union member countries. The regulators in these countries could notify PayPal (Europe) of local consumer protection laws that apply to its business, in addition to Luxembourg consumer protection law, and could also seek to persuade the Luxembourg regulator to order PayPal (Europe) to conduct its activities in the local country through a branch office. These or similar actions by these regulators could increase the cost of, or delay, our plans for expanding our business in European Union countries. In addition, the countries that are members of the European Union may each have different and potentially inconsistent interpretations of regulations implementing the European Union Payment Services Directive and the E-Money Directive, which could make compliance more costly and operationally difficult to manage. The ~~European Commission has proposed revisions~~Revised Payment Services Directive (“PSD2”) entered into force in January 2016 and will need to be implemented into national legislation by January 2018. The implementation of the ~~Payments Services and Anti-Money Laundering Directives, which could further make compliance more costly and operationally difficult to manage.~~PSD2 may negatively affect our business. Finally, if the assets of PayPal (Europe) exceed certain thresholds, or if the European Central Bank ("ECB") determines that PayPal (Europe) is a significant supervised entity or that some activity of PayPal (Europe) is subject to oversight by the ECB, PayPal (Europe) or certain of its activities could become directly regulated by the ~~European Central Bank~~ECB in addition to the Luxembourg regulator, the Commission de ~~surveillance~~Surveillance du ~~secteur financier~~Secteur Financier, as ~~our~~its national supervisor, which could subject us to additional requirements and ~~which would~~ would likely increase compliance costs.

~~We are subject to anti-money laundering~~Anti-Money Laundering and ~~counter-terrorist financing laws and regulations.~~

Counter-Terrorist Financing

We are subject to various anti-money laundering and counter-terrorist financing laws and regulations around the world that prohibit, among other things, our involvement in transferring the proceeds of criminal activities. We ~~have programs designed~~routinely report to comply with new and existing legal and regulatory requirements. However, any errors, failures, or delays in complying with federal, state or foreign anti-money laundering or counter-terrorist financing laws and regulations could result in significant criminal and civil lawsuits, penalties, forfeiture of significant assets, or other enforcement actions, as well as reputational harm. For example, violation ofthe U.S. Department of the Treasury’s Office of Foreign Assets Control ~~(“OFAC”~~("OFAC") on payments we have rejected or blocked pursuant to OFAC sanctions regulations and on any possible violations of those regulations. In March 2015, we reached a settlement with OFAC regarding possible violations arising from our practices between 2009 and 2013. In addition, we continue to cooperate with OFAC regarding other transactions that could also possibly be in violation of OFAC sanctions regulations. In addition, we continue to cooperate with OFAC regarding other transactions that we have self-reported could also possibly be in violation of OFAC sanctions regulations. Subsequent to our March 2015 settlement, we have received new subpoenas from OFAC seeking additional information about certain of these transactions. Such self-reported transactions could result in claims or actions against us including litigation, injunctions, damage awards, fines or penalties, or require us to change our business practices that could result in a material loss, require significant management time, result in the diversion of significant operational resources or otherwise harm our business. Violation of OFAC sanctions regulations that OFAC determines to be egregious can result in statutory penalties of up to $250,000

per transaction. For a discussion of our dealings with OFAC, please see “Note ~~10:~~11: Commitments and Contingencies - Litigation and Regulatory Matters.”

U.S. and other regulators ~~have increased~~globally continue to increase their scrutiny of compliance with these obligations, which may require us to further revise or expand our compliance program, including the procedures we use to verify the identity of our customers and to monitor international and domestic transactions. ~~Several~~Many countries in which we ~~are regulated~~operate also have ~~also implemented new~~ anti-money laundering and counter-terrorist financing laws and regulations, and we have been and ~~will~~ continue to be required to make changes to our compliance program in various jurisdictions in response. Regulators regularly re-examine the transaction volume thresholds at which we must ~~obctain~~obtain and keep applicable records or verify identities of customers and any change in such thresholds could result in greater costs for compliance. ~~Costs associated with fines or enforcement actions, changes in~~The European Commission has proposed revisions to the Fourth Anti-Money Laundering Directive, which was recently approved by the European Parliament. The implementation of this directive and the recently-adopted regulation on information accompanying transfer of funds (commonly known as the Revised Wire Transfer Regulation) could make compliance ~~requirements, or limitations on our ability~~more costly and operationally difficult to ~~grow our business could harm our business~~manage.

Privacy and any new requirements or changes to existing requirements could impose significant costs, result in delays to planned product improvements, make it more difficult for new customers to utilize our products and services and reduce the attractivenessProtection of ~~our products and services.~~

~~Regulation, legislation and judicial activity in the areas of privacy and data protection of user data could harm our business.~~User Data

We are subject to a number of laws, rules and directives (which we refer to as "privacy laws") relating to the collection, use, retention, security, processing and transfer (which we refer to as "process") of personally identifiable information about our customers and employees ~~(sometimes called personal data) worldwide.~~(which we refer to as "personal data") in the countries where we operate. Much of the personal ~~information~~data that we process, especially financial information, is regulated by multiple privacy laws and, in some cases, the privacy laws of multiple jurisdictions. ~~Data protection and privacy laws may be interpreted and applied inconsistently from country to country.~~ In many cases, these laws apply not only to third-party transactions, but also to transfers of information between or among us, our subsidiaries, and other parties with which we have commercial relationships. Most recently, the European Court of Justice in the Schrems case ruled that the U.S.-E.U. Safe Harbor framework clauses, one compliance method by which companies could transfer personal data regarding citizens of the European Union to the United States, could no longer be relied upon. The potential impact of this ruling is subject to further determination and additional developments, including the potential development of a new form of Safe Harbor framework or a requirement to find alternative bases for the compliant transfer of personal data from the E.U. to the U.S. While PayPal does not rely on the Safe Harbor framework for the transfer of E.U. personal data to the United States, some of our service providers, customers or other business partners do. In addition, 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 E.U. However, a recent European Court of Justice ruling (Weltimmo) affecting companies that do business in the E.U. potentially could make us subject to the local data protection laws or regulatory enforcement activities of the various E.U. member states in which we have established legal entities. The legal and regulatory environment around privacy and data protection laws continue to develop in ways we cannot predict and that may require us to change our business practices, increase the cost and complexity of compliance, subject us to increased regulatory scrutiny and the risk of penalties, fines or litigation, and could harm our business.

Regulatory scrutiny of privacy, data protection, collection, use and sharing of data is increasing on a global basis. ~~We are subject to a number of~~There is uncertainty associated with the legal and regulatory environment around privacy and data protection ~~and similar privacy~~ laws, ~~and regulations in the countries in~~ which ~~we operate and these privacy laws and regulations likely will~~ continue to ~~evolve over time, both through regulatory~~develop in ways we cannot predict. Privacy and ~~legislative action~~data protection laws may be interpreted and ~~judicial decisions. Some of these privacy laws~~applied inconsistently from country to country and impose ~~requirements that are~~ inconsistent ~~with one another, yet regulators may claim that both apply.~~or conflicting requirements. Complying with ~~these~~ varying ~~national~~jurisdictional requirements could increase the costs and complexity of compliance or require us to change our business practices in a manner adverse to our business, and violations of privacy and data protection-related laws can result in significant penalties and damage to our brand and business. In addition, compliance with ~~these~~ inconsistent privacy laws may restrict our ability to provide products and services to our customers. A determination that there have been violations ~~of laws~~ of privacy or data protection laws could expose us to significant damage awards, fines and other penalties that could, individually or in the aggregate, materially harm our business and reputation.

In ~~particular,~~October 2015, the European Court of Justice ruled that the U.S.-EU Safe Harbor framework clauses, one compliance method by which companies could transfer personal data regarding citizens of the European Union to the United States, could no longer be relied upon. The U.S. and EU authorities have agreed in principle on a replacement for Safe Harbor known as “Privacy Shield”. The Privacy Shield approach has not been fully ratified by all parties and we anticipate that there may be challenges to this initiative. PayPal has chosen to adopt EU model clauses published by the European Commission as a basis for the export of data from the EU to the U.S. for those parts of our business that had previously relied on Safe Harbor. In addition, 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 recent 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 which may even conflict with, those in Luxembourg.

In addition, because of the ~~enormous~~large number of text messages, emails, phone calls and other communications we send or make to our customers ~~including to service their accounts, protect against fraud, or collect debts,~~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, ~~the Federal Communications Commission amended certain of its regulations~~ under the Telephone Consumer Protection Act ~~or TCPA,~~("TCPA"), in ~~2012 and 2013 in a manner that could increase our exposure to liability for certain types of telephonic communication with customers, including but not limited to text messages to mobile phones. Under~~ the ~~TCPA,~~U.S., plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may treble the damage award for willful or knowing violations. We have been, are, ~~regularly~~and may continue to be subject to lawsuits (including class-action ~~lawsuits, as well as individual lawsuits,~~lawsuits) containing allegations that our business violated the TCPA. These lawsuits seek damages (including statutory damages) and injunctive relief, among other remedies. Given the ~~enormous~~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.

The EU has recently adopted a comprehensive overhaul of its data protection regime from the current national legislative approach to a single European Economic Area Privacy Regulation, the General Data Protection Regulation ("GDPR"), which comes into effect in 2018. The proposed EU data protection regime extends the scope of the EU data protection law to all foreign companies

processing data of EU residents. It provides for a harmonization of the data protection regulations throughout the EU, thereby making it easier for non-European companies to comply with these regulations. It imposes strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide turnover and €20 million and includes new rights such as the “portability” of personal data. Although the GDPR will apply across the EU without a need for local implementing legislation, as has been the case under the current data protection regime, local data protection authorities (DPAs) will still have the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country basis.

We post on our websites our privacy policies and practices including concerning the collection, use and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any applicable regulatory requirements or orders, or ~~other federal, state or international~~ privacy, data protection, information security or consumer protection-related privacy laws and regulations in one or more jurisdictions could result in proceedings or actions against us by governmental entities or others, ~~(e.g.,~~including class action privacy litigation in certain ~~jurisdictions),~~jurisdictions, subject us to significant fines, penalties, judgments and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. Data protection, privacy and information security have become the subject of increasing public, media and legislative concern. If our customers were to reduce their use of our products and services as a result of these concerns, our business could be materially harmed. As noted above, we are also subject to the possibility of security and privacy breaches, which themselves may result in a violation of these privacy laws.

PayPal is not a bank or licensed lender in the United States and relies upon third parties to make loans and provide other products critical to our business.

As PayPal is neither a chartered financial institution nor licensed to make loans in any state, we ~~must~~ rely on a ~~bank or licensed lender~~third party chartered financial institution to ~~offer~~issue the PayPal Credit consumer product in the ~~United States. Currently, when a~~ U.S. consumer makes a purchase using the PayPal Credit product, a chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale, and advances funds to the merchant. We subsequently purchase and retain receivables related to the consumer loans and, as a result, bear the risk of loss in the event of loan defaults. Although the chartered financial institution continues to own each of the consumer accounts and purchases a participation interest in the pool of receivables related to these accounts, we own the related receivable (excluding participation interests sold) and are responsible for all servicing functions related to the account. When a U.S. PayPal merchant receives a PayPal Working Capital advance, a different chartered financial institution extends the credit and advances funds to the merchant. We subsequently purchase and retain the net receivables and, as a result, bear the risk of loss in the event of loan defaults.

~~As described, a chartered financial institution currently issues the PayPal Credit consumer product in the United States,~~, and a different chartered financial institution ~~currently issues~~to issue the PayPal Working Capital product in the ~~United States; both~~U.S. Both of

these chartered financial institutions are industrial banks chartered by the State of Utah. In the event of a termination or interruption in the ability of the chartered financial institution that currently issues the PayPal Credit consumer product in the ~~United States~~U.S. to lend under the PayPal Credit consumer product, our chartered financial institution that issues the PayPal Working Capital ~~Product~~product in the U.S., has agreed to take ownership of (and originate loans with respect to) all consumer accounts. Nevertheless, any termination or interruption of either bank’s ability to lend could result in the inability to originate any new PayPal Credit or PayPal Working Capital ~~products.~~loans. In the event of either bank’s inability to lend, we would either need to reach a similar agreement with another chartered financial institution or obtain our own bank charter or licenses. We ~~could not guarantee that we could~~may be unable to reach a similar ~~arrangement~~agreement with another partner on favorable terms or at all, and obtaining a bank charter or lending licenses would be a time-consuming and costly process and would subject us to additional laws and regulatory requirements, which could be burdensome and increase our costs.

~~Our credit products expose~~ In addition, our commercial relationships with third parties which are federally supervised U.S. financial institutions could subject us to ~~additional risks.~~examination by their federal banking regulators with respect to certain services that we provide.

~~Our PayPal Credit and PayPal Working Capital products are offered to~~A recent judicial decision by the U.S. Second Circuit Court of Appeals, Madden v. Midland Funding, LLC (786 F.3d 246 (2d Cir. 2015)), concluded that the debt buyer of a ~~wide range of consumers and merchants, and the financial success of these products depends~~charged off credit card account could not rely on the ~~effective management~~National Bank Act's preemption of state interest rate limits for interest at rates imposed by the debt buyer after charge-off. A petition to the United States Supreme Court to review the decision was denied on June 27, 2016; the case will now be remanded to the lower court to be determined in accordance with the ruling of the ~~risk related~~Second Circuit. The decision has resulted in some uncertainty as to ~~these products. The lenders extend credit at the point~~whether non-bank entities purchasing loans originated by a bank may rely on federal preemption of ~~sale using proprietary segmentation~~state usury laws, and ~~credit algorithms and other analytical techniques designed to analyze the credit~~may create an increased risk of specific consumers based on their past purchasing and payment history as well as their credit scores. Similarly, to assess a merchant who wishes to obtain a PayPal Working Capital advance, we use, among other indicators, a risk model that we have internally developed that we refer to as our PayPal Working Capital Risk Model (“PRM”), as a credit quality indicator to help predict the merchant's ability to repay the principal balance and fixed fee related to the working capital advance. The PRM uses multiple variables as predictors of the merchant's ability to repay a working capital advance. Primary drivers of the model include the merchant's annual payment volume, payment processing history and prior repayment history with the PayPal Working Capital product, as well as other measures. These algorithms and techniques may not accurately predict the creditworthiness of a consumer or merchant due to inaccurate assumptions about the particular consumer or merchant or the economic environment, or limited product history, among other factors. The accuracy of the predictive algorithms and techniques and the ability of the lenders andlitigation by plaintiffs challenging our ability to ~~manage credit risk related~~collect interest in accordance with the terms of certain of our loans. Although the Madden decision specifically addressed preemption under the National Bank Act, this decision could support future challenges to ~~the PayPal Credit and PayPal Working Capital~~federal preemption for other institutions, including FDIC-insured, state chartered industrial banks like those that we rely on to issue our loan products ~~may also be affected by legal or regulatory changes (e.g., bankruptcy laws and minimum payment regulations), competitors’ actions, changes in consumer behavior, changes~~ in the economic environment and other factors. In addition, economic and financial conditions may affect consumer confidence levels and reduce consumers’ ability or willingness to use credit, including credit extended by a lender to PayPal Credit account holders who useUnited States. Although we believe the ~~PayPal Credit products,~~Madden case can be distinguished from the manner in which ~~could harm our business.~~

Like other businesses with significant exposure to losses from consumer credit, we face the risk that PayPal Credit consumer account holders will default on their payment obligation, making the receivables uncollectible and creating the risk of potential charge-offs. The rate at which receivables were charged off as uncollectible, or the net charge-off rate, was approximately 5.67% for the year ended December 31, 2014. The non-payment rate among account holders may increase due to, among other things, charges to underwriting standards, worsening economic conditions, such as a recession or greater austerity in various countries, and high unemployment rates. Account holders who miss payments often fail to repay their loans, and account holders who file for protection under the bankruptcy laws generally do not repay their loans.

We purchase receivables related to PayPal Credit and PayPal Working Capital products. If we are unable to fund our purchase of these receivables adequately or in a cost-effective manner, or if we are unable to efficiently manage the cash resources utilized to purchase these receivables, our business could be harmed.

The PayPal Credit consumer product is reliant on third-party merchant processors and payment gateways to process a significant portion of transactions. Any disruption to these third-party payment processing and gateway services would adversely affect the PayPal Credit products.

~~We have expanded our PayPal Working Capital Program to include small business products offered directly by us (without the involvement of a third-party financial institution) to the UK, where~~ we offer cash advances to PayPal merchants through a factoring arrangement, and to Australia, where we offer loans to select PayPal merchants. Additionally, we have launched PayPal Credit for consumers in the UK and Germany. Our expansion of our PayPal Credit product offerings exposes us to additional risks, including those discussed below under the risk factor titled “Our international operations are subject to increased risks, which could harm our business.”

~~New and proposed laws and regulations could harm our business.~~

We are subject to laws, rules and regulations affecting our domestic and international operations in a number of areas, including data protection, privacy and information security-related requirements, intellectual property ownership and infringement,

tax, competition law, banking secrecy, import and export requirements, anti-corruption, labor, advertising, billing, promotions, quality of services, real estate, environmental, and health and safety regulations. It is not always clear how these laws, rules and regulations apply to our business. Many of these laws, rules and regulations were adopted prior to the advent of the Internet, mobile and related technologies, and, as a result, do not contemplate or address the unique issues of the Internet, mobile and related technologies. Many of these laws, rules and regulations, including some that do refer to the Internet, mobile and related technologies, are subject to interpretation by the courts on an ongoing basis and, as a result, their applicability and scope remain uncertain.

Compliance with these laws, rules, regulations, and similar requirements may be onerous and expensive, and variances and inconsistencies from jurisdiction to jurisdiction may further increase the cost of compliance and doing business. For example, new laws, rules and regulations in certain countries require us to maintain separate servers located in those countries so that all personal data, including financial information, of citizens of that country are maintained locally, and similar requirements have been proposed in other countries. The costs of complying with such laws, which may rise in the future as a result of changes in these laws, rules and regulations or in their interpretation, could individually or in the aggregate make ourcredit products, and services less attractive to our customers, delay the introduction of new products or services in one or more regions, increase the cost or complexity of compliance, or cause us to change or limit our business practices. We have implemented policies and procedures designed to help ensure compliance with applicable laws, rules and regulations, but there can be no ~~assurance that our employees, contractors, or agents will not violate such laws, rules and regulations or our policies and procedures~~assurances as to the outcome of any potential litigation, or that ~~those requirements~~the possible impact of such litigation will ~~not further evolve or change.~~

Financial and political events have increased the level of regulatory scrutiny on large companies, and regulatory agencies may view matters or interpret laws and regulations differently than they have in the past and in a manner adverse to our business. Our success and increased visibility have driven existing businesses that perceive us to be a threat to their businesses to raise concerns about our business models to policymakers and regulators. These businesses and their trade association groups employ significant resources in their efforts to shape the legal and regulatory regimes in countries where we have significant operations. They may employ these resources in an effort to change the legal and regulatory regimes in ways intended to reduce the effectiveness of our business and the ability of customers to use our products and services.

As we expand and localize our international activities, we are increasingly becoming obligated to comply with the laws of the countries or markets in which we operate. In addition, because our services are accessible worldwide and we facilitate sales of goods and provide services to customers worldwide, one or more jurisdictions may claim that we or our customers are required to comply with their laws. Laws regulating the Internet, mobile and related technologies outside of the United States often impose different or more specific obligations on us in areas relating to licenses, authorizations, as well as broader liability matters than those in the United States. Compliance may be more costly or may require us to change our business practices or restrict our services, and the imposition of any regulations on us or our customers could harm our business. In addition, we may be subject to multiple overlapping legal or regulatory regimes that impose conflicting requirements on us (e.g., in cross-border trade). Our failure or alleged failure to comply with foreign laws could subject us to penalties ranging from criminal prosecution to significant fines to bans on our products and services, in addition to the significant costs we may incur in defending against such actions and reputational harm.

Following the global financial crisis of 2008, U.S. federal lawmakers enacted the Dodd-Frank Act overhauling the federal government’s oversight of consumer financial products and systemic risk in the U.S. financial system. The general effect of the financial reform law has been, and we expect will continue to be, to require us to make additional disclosures to our consumers and to impose new restrictions and requirements on certain of our activities, resulting in new compliance requirements and obligations that could increase our costs, may result in increased litigation and the need to make expensive product or operational changes, and could otherwise harm our business.

~~Substantial and increasingly intense competition worldwide in the global payments industry may harm our business.~~

The global payments industry is highly competitive. We compete against businesses in varied industries, many of which are larger than we are, have a dominant and secure position in other industries, or offer other goods and services to consumers and merchants which we do not offer. As online and offline commerce increasingly converge, the pace of change, innovation and disruption is increasing. The global payments industry is rapidly changing, highly innovative and increasingly subject to regulatory scrutiny, which may negatively affect the competitive landscape. We compete against all forms of payments, including:

~~paper-based transactions (principally cash and checks);~~

~~providers of traditional payment methods, particularly credit and debit cards, and Automated Clearing House transactions (these providers are primarily well-established banks);~~

providers of “digital wallets” which offer customers the ability to pay online and/or on mobile devices through a variety of payment methods, including with mobile applications, through contactless payments, and with a variety of payment cards;

providers of mobile payments solutions that use tokenized card data approaches and Near Field Communication (“NFC”) functionality (including Host Card Emulation (“HCE”) functionality to eliminate the need for access to the physical secure element in the device);

payment-card processors that offer their services to merchants, including for “card on file” payments where the merchant invites the consumer to select a payment method for their first transaction, and subsequently uses the same payment method for subsequent transactions;

~~providers of “person-to-person” payments that facilitate individuals sending money with an email address or mobile phone number;~~

~~providers of mobile payments; and~~

~~providers of card readers for mobile devices and of other new point of sale and multi-channel technologies.~~

~~We also face competition and potential competition from:~~

~~money remitters;~~

~~services that provide online merchants the ability to offer their customers the option of paying for purchases from their bank account or paying on credit in the United States and abroad;~~

~~issuers of stored value targeted at online payments;~~

~~other international online payment-services providers;~~

~~other providers of online account-based payments;~~

~~payment services targeting users of social networks and online gaming, including those offering billing to the consumer’s mobile phone account;~~

~~mobile payment services between bank accounts;~~

~~payment services enabling banks to offer their online banking customers the ability to send and receive payments through their bank account;~~

~~online shopping services that provide special offers linked to a specific payment provider; and~~

~~services that help merchants accept and manage virtual currencies.~~

Some of these payment providers have greater customer bases, volume, scale, and market share than we do, which may provide significant competitive advantages. Some of these 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 they may offer lower prices or more effectively introduce their own innovative programs and services that adversely impact our growth. We also expect new entrants to offer competitive products and services. In addition, some merchants provide such services for themselves. Competing services tied to established banks and other financial institutions may offer greater liquidity and engender greater consumer confidence in the safety and efficacy of their services. In addition, in certain countries, such as Germany, Netherlands and Australia, electronic funds transfer is a leading method of payment for both online and offline transactions. As in the United States, established banks and other financial institutions that do not currently offer online payments could quickly and easily develop such a service.

~~We compete primarily on the basis of the following:~~

~~ability to attract, retain and engage both merchants and consumers with relatively low marketing expense;~~

~~ability to show that merchants will achieve incremental sales by offering our PayPal services;~~

~~security of transactions and the ability for consumers to use our PayPal products and services without sharing their financial information with the merchant or the party they are paying;~~

~~simplicity of our fee structure;~~

~~ability to develop services across multiple commerce channels, including mobile payments and payments at the retail point of sale;~~

~~trust in our dispute resolution and buyer and seller protection programs;~~

~~customer service;~~

~~brand recognition;~~

~~website, mobile platform and application onboarding, ease-of-use and accessibility;~~

~~system reliability and data security;~~

~~ease and quality of integration into third-party mobile applications; and~~

~~quality of developer tools such as our application programming interfaces and software development kits.~~

If we are not able to differentiate our business from those of our competitors, drive value for our customers, and/or effectively align our resources with our goals and objectives, we may not be able to compete effectively against our competitors. Our failure to compete effectively against any of the foregoing competitive threats could materially and adversely harm our business.

~~We are exposed to fluctuations in foreign currency exchange rates.~~

We have significant operations internationally that are denominated in foreign currencies, primarily the Euro, British Pound, and Australian Dollar, subjecting us to foreign currency risk. The strengthening or weakening of the U.S. dollar versus the Euro, British Pound, and Australian Dollar impacts the translation of our net revenues generated in these foreign currencies into the U.S. dollar. In 2014, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $58 million (inclusive of a $36 million negative impact from hedging activities). Additionally, in connection with our services in multiple currencies, we set our foreign exchange rates twice per day, and may face financial exposure if we incorrectly set our foreign exchange rates or as a result of fluctuations in foreign exchange rates between the times that we set our foreign exchange rates. Given that we also hold some corporate and customer funds in non-U.S. currencies, our financial results are affected by the translation of these non-U.S. currencies into U.S. dollars. While we regularly enter into transactions to hedge portions of our foreign currency translation exposure, it is impossible to predict or eliminate the effects of this exposure. Fluctuations in foreign exchange rates could significantly impact our financial results.

~~We are exposed to fluctuations in interest rates.~~

We are exposed to interest rate risk from our investment portfolio and from interest-rate sensitive assets underlying the customer balances we hold on our balance sheet as customer accounts. As of December 31, 2014, approximately 97% of our total cash and investment portfolio was held in cash and cash equivalents. The assets underlying our customer balances we hold on our balance sheet as customer accounts are maintained in interest and non-interest bearing bank deposits, time deposits, and U.S. and foreign government and agency securities. We seek to preserve principal while holding eligible liquid assets, as defined by the regulatory requirements and commercial law in the jurisdictions in which we operate, equal to at least 100% of the aggregate amount of all customer balances. We do not pay interest on amounts due to customers. A 100 basis point adverse change in interest rates would not have a material adverse impact on our ~~financial assets or liabilities at December 31, 2014 and 2013.~~

~~In addition, fluctuations~~business. Additionally, certain issues to be decided on remand in interest rates may adversely impact our customers’ spending levels and ability and willingness to pay outstanding amounts owed to us. Higher interest rates often lead to higher payment obligations by customers to us and other lenders under mortgage, credit card and other consumer loans, which may reduce our customers’ ability to remain current on their obligations to us and therefore lead to increased delinquencies, charge-offs and allowance for loan and interest receivable which could have an adverse effect on our net income.

~~In July 2015, we entered into a new revolving credit facility. As a result, we will be exposed to fluctuations in interest rates~~the Madden case, including those related to the ~~extent~~choice of ~~our borrowings under~~law provision for the ~~facility, which bear interest at a floating rate.~~

~~Changes to our buyer and seller protection programs could increase our loss rate.~~

Our buyer and seller protection programs protect merchants and consumers from fraudulent transactions. We recently increased the scope of our buyer protection program to cover digital goods and intangible goods and services. In addition, consumers who pay through PayPal may have reimbursement rights from their payment card issuer (usually a bank), which in turn will seek recovery from us. The risk of losses from our buyer and seller protection programs are specific to individual buyers, sellers and transactions, and may also be impacted by regional variations to these programs, modifications to these programs resulting from changes in regulatory requirements, or changes that we decide to implement, such as expanding the scope of transactions covered by one or more of these programs. Upon PayPal becoming an independent publicly-traded company on July 17, 2015 through the distribution of 100 percentloans, might alleviate some of the outstanding capital stock of PayPal to eBay’s stockholders, which we refer to as the distribution, we extended our protection programs in several countries to cover certain customers’ purchases on eBay, and our costs associated with these programs have therefore increased. For the periods presented in the financial statements included in Part I of this Report, payments under these programs have ranged between 0.08% and 0.12% of TPV on an annual basis. Historical trends may not be an indication of future payments under these programs. Increases in our loss rate resulting from changes to our buyer and seller protection programs could harm our business.

~~Our international operations are subject to increased risks, which could harm our business.~~

Our international operations, especially in the United Kingdom, Germany (and the other countries of the European Union) and China, have generated a majority of our net revenues in recent years. In addition to uncertainty ~~about our ability to generate revenues from our foreign operations and expand into international markets, there are risks inherent in doing business internationally, including:~~

expenses associated with localizing our products and services and customer data, including offering customers the ability to transact business in the local currency and adapting our products and services to local preferences (e.g., payment methods) with which we may have limited or no experience;

~~trade barriers and changes in trade regulations;~~

~~difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences;~~

~~stringent local labor laws and regulations;~~

~~credit risk and higher levels of payment fraud;~~

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

~~political or social unrest, economic instability, repression, or human rights issues;~~

~~geopolitical events, including natural disasters, public health issues, acts of war, and terrorism;~~

~~import or export regulations;~~

compliance with U.S. laws such as the Foreign Corrupt Practices Act, and foreign laws prohibiting corrupt payments to government officials, as well as U.S. and foreign laws designed to combat money laundering and the financing of terrorist activities;

~~antitrust and competition regulations;~~

~~potentially adverse tax developments and consequences;~~

~~economic uncertainties relating to sovereign and other debt;~~

~~different, uncertain, or more stringent user protection, data protection, privacy, and other laws;~~

~~risks~~ related to ~~other government regulation or required compliance with local laws;~~

~~risks related to multiple overlapping legal or regulatory regimes, which may impose conflicting requirements on us;~~

~~national or regional differences in macroeconomic growth rates;~~

~~local licensing and reporting obligations; and~~

~~increased difficulties in collecting accounts receivable.~~

~~Violations of~~ the complex foreign and U.S. laws, rules and regulations that apply to our international operations may result in fines, criminal actions, or sanctions against us, our officers, or our employees; prohibitions on the conduct of our business; and damage to our reputation. Although we have implemented policies and procedures designed to promote compliance with these laws, violations by our employees, contractors, or agents could nevertheless occur. These risks are inherent in our international operations and expansion, may increase our costs of doing business internationally, and could harm our business.

~~Use of our payments services for illegal purposes could harm our business.~~ruling.

Our payment system is susceptible to potentially illegal or improper uses, including terrorist financing, illegal online gambling, fraudulent sales of goods or services, illicit sales of prescription medications or controlled substances, piracy of software, movies, music, and other copyrighted or trademarked goods, money laundering, bank fraud, child pornography trafficking, prohibited sales of alcoholic beverages or tobacco products, online securities fraud, or to facilitate other illegal activity. Certain activity that may be legal in one country may be illegal in another country, and a merchant may intentionally or inadvertently be found responsible for importing illegal goods, creating liability to us. There has been an increased focus by intellectual property rights owners and government officials on the role that payments systems play in the sale of, and payment for, pirated digital goods on the Internet, primarily through file sharing services. Changes in law have increased the penalties for intermediaries providing payment services for certain illegal activities and additional payments-related proposals are under active consideration by government authorities. Intellectual property rights owners may seek to bring legal action against providers of payments solutions, including PayPal, and other entities that are peripherally involved in the sale of infringing items. Rights owners have also increasingly gone into U.S. courts and obtained injunctions requiring us to cease handling transactions for named websites and third parties (in most cases located outside the United States) and to hold the funds of such parties pending judicial resolution of the rights owners’ claims, which disrupts the relationship between such parties and us. Any resulting claims could result in reputational harm and any resulting liabilities, loss of transaction volume or increased costs could harm our business.

~~Our~~ failure to manage our customer funds and the assets underlying our customer funds properly could harm our business.

Our ability to manage and account accurately for the assets underlying our customer funds requires a high level of internal controls. As our business continues to grow and we expand our product offerings, we must continue to strengthen our associated internal ~~controls accordingly.~~controls. In March 2016, as approved by the Supervisory Board of our Luxembourg banking subsidiary and as permitted within regulations set forth by the CSSF, we have designated certain European customer balances held in our Luxembourg banking subsidiary to be used to extend credit to our European customers. Our success requires significant public confidence in our ability to properly manage our customers’ balances and handle large and growing transaction volumes and amounts of customer funds.

Any failure to maintain the necessary controls or to manage our customer funds and the assets underlying our customer funds accurately could result in reputational harm, lead customers to discontinue or reduce their use of our products and result in significant penalties and fines, which could ~~harm our business.~~

~~We are subject to regulatory activity and antitrust litigation under competition laws.~~

We are subject to scrutiny by various government agencies under U.S. and foreign laws and regulations, including antitrust and competition laws. An increasing number of jurisdictions also provide private rights of action for competitors or consumers to assert claims of anti-competitive conduct. Other companies and government agencies have in the past and may in the future allege that our actions violate the antitrust or competition laws of the United States, individual states, the European Commission or other countries, or otherwise constitute unfair competition. An increasing number of governments are regulating competition law activities, including increased scrutiny in large markets such as China. Our business agreements or arrangements with customers or other companies could give rise to regulatory action or antitrust litigation. Some regulators, particularly those outside of the United States, may perceive our business to be used so broadly that otherwise uncontroversial business practices could be deemed anticompetitive. Any claims or investigations, even if without foundation, may be very expensive to defend or respond to, involve negative publicity and substantial diversion of management time and effort and could result in significant judgments against us or require us to change our business practices.

~~We are subject to patent litigation.~~

We have repeatedly been sued for allegedly infringing other parties’ patents. We are a defendant in a number of patent lawsuits and have been notified of several other potential patent disputes. We expect that we will increasingly be subject to patent infringement claims because, among other reasons:

~~our products and services continue to expand in scope and complexity;~~

~~we continue to expand into new business areas, including through acquisitions; and~~

the number of patent owners who may claim that we, any of the companies that we have acquired, or our customers infringe their patents, and the aggregate number of patents controlled by such patent owners, continues to increase.

Such claims may be brought directly against us and/or against our customers whom we may indemnify either because we are contractually obligated to do so or we choose to do so as a business matter. We believe that an increasing number of these claims against us and other technology companies have been, and continue to be, initiated by third parties whose sole or primary business is to assert such claims. In addition, we have seen significant patent disputes between operating companies in some technology industries. Patent claims, whether meritorious or not, are time-consuming and costly to defend and resolve, and could require us to make expensive changes in our methods of doing business, enter into costly royalty or licensing agreements, make substantial payments to satisfy adverse judgments or settle claims or proceedings, or cease conducting certain operations, which would harm our business.

~~We may be unable to adequately protect or enforce our intellectual property rights, or third parties may allege that we are infringing their intellectual property rights.~~

We believe the protection of our intellectual property, including our trademarks, patents, copyrights, domain names, trade dress, and trade secrets, is critical to our success. We seek to protect our intellectual property rights by relying on applicable laws and regulations in the United States and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights when offering or procuring products and services, including confidentiality and invention assignment agreements entered into with our employees and contractors and confidentiality agreements with parties with whom we conduct business.

However, effective intellectual property protection may not be available in every country in which our products and services are made available, and contractual arrangements and other steps that we have taken to protect our intellectual property may not prevent third parties from infringing or misappropriating our intellectual property or deter independent development of equivalent or superior intellectual property rights by others. We must protect our intellectual property rights, including our trademarks, patents, copyrights, domain names, trade dress, and trade secrets, and other proprietary rights in an increasing number of jurisdictions, a process that is expensive and time-consuming and may not be successful in protecting or enforcing our rights

in every jurisdiction. Also, we may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to others. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation. Any failure to adequately protect or enforce our intellectual property rights, or significant costs incurred in doing so, could materially harm our business.

As the number of products in the software industry increases and the functionality of these products further overlap, and as we acquire technology through acquisitions or licenses, we may become increasingly subject to infringement claims, including patent, copyright, and trademark infringement claims. Litigation may be necessary to determine the validity and scope of the patent and other intellectual property rights of others. The ultimate outcome of any allegation is uncertain and, regardless of the outcome, any such claim, with or without merit, may be time-consuming, result in costly litigation, divert management’s time and attention from our business, and require us to, among other things, stop providing transaction processing and other payment related services or redesign or stop selling our products or services, or require us to pay substantial amounts to satisfy judgments or settle claims or lawsuits or to pay substantial royalty or licensing fees, or to satisfy indemnification obligations that we have with certain parties with whom we have commercial relationships. Our failure to obtain necessary license or other rights, or litigation or claims arising out of intellectual property matters, may harm our business.

~~We are regularly subject to general litigation, regulatory disputes, and government inquiries.~~

We are regularly subject to claims, lawsuits (including class actions and individual lawsuits), government or regulatory investigations, and other proceedings involving competition and antitrust law, intellectual property, privacy, data protection, information security, consumer protection, accessibility claims, securities, tax, labor and employment, commercial disputes, services and other matters. In particular, our business faces ongoing consumer protection and intellectual property litigation, as discussed above. The number and significance of these disputes and inquiries have increased as our company has grown larger, our business has expanded in scope and geographic reach, and our products and services have increased in complexity. In addition, some of the laws, rules and regulations affecting Internet and mobile commerce and consumer credit are subject to ongoing interpretation by the courts and governmental authorities, and the resulting uncertainty in the scope and application of these laws, rules and regulations increases the risk that we will be subject to private claims and governmental actions alleging violations of those laws, rules and regulations.

The outcome and impact of such claims, lawsuits, government investigations, and proceedings cannot be predicted with certainty. Regardless of the outcome, such investigations and proceedings can have an adverse impact on us because of legal costs, diversion of management resources, and other factors. Determining reserves for our pending litigation is a complex, fact-intensive process that is subject to management’s judgment. It is possible that a resolution of one or more such proceedings could require us to make substantial payments to satisfy judgments, fines or penalties or to settle claims or proceedings, any of which could materially and adversely affect our business. These proceedings could also result in reputational harm, criminal sanctions, consent decrees, or orders preventing us from offering certain products or services, requiring a change in our business practices in costly ways, or requiring development of non-infringing or otherwise altered products or technologies. Any of these consequences could materially and adversely affect our business.

Certain of our customer agreements contain arbitration provisions with class action waiver provisions that may limit our exposure to consumer class action litigation, but there can be no assurance that we will be successful in enforcing these arbitration provisions, or the class action waiver provisions in them, in the future or in any given case. There may also be legislative, administrative or regulatory developments that may directly or indirectly prohibit or limit the use of pre-dispute arbitration clauses and class action waiver provisions, including by the CFPB. Any such prohibitions or limitations on or discontinuation of the use of such arbitration provisions or class action waivers, could subject us to additional lawsuits, including additional consumer class action litigation.

~~We may have exposure to greater than anticipated tax liabilities.~~

The determination of our worldwide provision for income taxes and other tax liabilities requires estimation and significant judgment, and there are many transactions and calculations where the ultimate tax determination is uncertain. Like many other multinational corporations, we are subject to tax in multiple U.S. and foreign tax jurisdictions. Our determination of our tax liability is always subject to audit and review by applicable domestic and foreign tax authorities, and we are currently undergoing a number of investigations, audits and reviews by taxing authorities throughout the world, including with respect to our tax structure. Any adverse outcome of any such audit or review could have a negative effect on our business and the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for

which such determination is made. While we have established reserves based on assumptions and estimates that we believe are reasonable to cover such eventualities, these reserves may prove to be insufficient.

In addition, our future income taxes could be adversely affected by earnings being lower than anticipated (or by the incurrence of losses) in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, as a result of gains on our foreign exchange risk management program, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.

In light of continuing fiscal challenges in certain U.S. states and in many countries in Europe, various levels of government are increasingly focused on tax reform and other legislative or regulatory action to increase tax revenue, including corporate income taxes. For example, the economic downturn reduced tax revenues for United States federal and state governments, and a number of proposals to increase taxes from corporate entities have been implemented or are being considered at various levels of government. These include a number of proposals to modify the U.S. federal income tax laws applicable to companies, like ours, operating in multiple U.S. and foreign jurisdictions which, if enacted, could materially increase our effective tax rate. A number of U.S. states have attempted to increase corporate tax revenues by taking an expansive view of corporate presence to attempt to impose corporate income taxes and other direct business taxes on companies that have no physical presence in their state, and taxing authorities in foreign jurisdictions may take similar actions. Many U.S. states are also altering their apportionment formulas to increase the amount of taxable income or loss attributable to their state from certain out-of-state businesses. Similarly, in Europe, and elsewhere in the world, there are various tax reform efforts underway designed to ensure that corporate entities are taxed on a larger percentage of their earnings. Any such tax reform or other legislative or regulatory actions to increase tax revenue could increase our effective tax rate.

~~We and our merchants may be subject to sales reporting and record-keeping obligations.~~

One or more states or the federal government or foreign countries may seek to impose reporting or record-keeping obligations on companies that engage in or facilitate ecommerce. Such an obligation could be imposed by legislation intended to improve tax compliance (and legislation to such effect has been contemplated by several states and is in the process of being implemented by a number of foreign jurisdictions) or if one of our companies was deemed to be the legal agent of our merchants by a jurisdiction in which it operates. We are required to report to the Internal Revenue Service (“IRS”) on customers subject to U.S. income tax who receive more than $20,000 in payments and more than 200 payments in a calendar year. As a result, we are required to request tax identification numbers from certain payees, track payments by tax identification number and, under certain conditions, withhold a portion of payments and forward such withholding to the IRS. We have modified our software to meet these requirements and expect increased operational costs and changes to our customer experience in connection with complying with these reporting obligations. The IRS regulations also require us to collect a certification of non-U.S. taxpayer status from certain international merchants. The Foreign Account Tax Compliance Act, which took effect at the start of 2013, will increase the number of non-U.S. customers from whom we must obtain a similar certification, as well as our associated compliance burdens. Any failure by us to comply with these and similar reporting and record-keeping obligations could result in substantial monetary penalties and other sanctions and could harm our business.

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

We have acquired a significant number of businesses of varying size and scope, technologies, services, and products. In July 2015, we announced that we have agreed to acquire Xoom Corporation, which provides international money transfer and remittances across a number of cross-border corridors. This acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to close in the fourth quarter of 2015; however, if these conditions are not satisfied or waived, the transaction could be delayed or not take place.

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

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

declining employee morale and retention issues affecting employees of companies that we acquire or dispose of, which may result from changes in compensation, or changes in management, reporting relationships, future prospects or the direction of the acquired or disposed business;

~~difficulty making new and strategic hires of new employees;~~

~~diversion of management time and a shift of focus from operating the business to the transaction, and in the case of an acquisition, integration and administration;~~

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

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

the need to implement or improve controls, procedures and policies appropriate for a larger public company at companies that prior to acquisition may have lacked such controls, procedures and policies or whose controls, procedures and policies did not meet applicable legal and other standards;

~~potential exposure to new or increased regulatory oversight associated with new lines of business;~~

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

~~derivative lawsuits resulting from the acquisition;~~

liability for activities of the acquired company before the acquisition, including intellectual property and other litigation claims or disputes, violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities;

~~the potential loss of key employees following the transaction;~~

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

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

At any given time we may be engaged in discussions or negotiations with respect to one or more of these types of transactions and any of these transactions could be material to our financial condition and results of operations. In addition, it may take us longer than expected to fully realize the anticipated benefits of these transactions, and those benefits may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results. Any acquisitions or dispositions may also require us to issue additional equity securities, spend our cash, or incur debt (and increased interest expense), liabilities, and amortization expenses related to intangible assets or write-offs of goodwill, which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders.

In addition, we may make certain investments, including through joint ventures, in which we have a minority equity interest and/or lack management and operational control. Under such circumstances, the controlling joint venture partner in a joint venture investment may have business interests, strategies or goals that are inconsistent with ours, and business decisions or other actions or omissions of the controlling investor, joint venture partner or joint venture company may result in reputational harm or adversely affect the value of our investment in the investment or joint venture.

~~We are subject to risks associated with information disseminated through our services.~~

Online services companies may be subject to claims relating to information disseminated through their services, including claims alleging defamation, libel, breach of contract, invasion of privacy, negligence, copyright or trademark infringement, among other things. The laws relating to the liability of online services companies for information disseminated through their services are subject to frequent challenges both in the United States and foreign jurisdictions. Any liabilities incurred as a result of these matters could require us to incur additional costs and harm our reputation and our business.

Our potential liability to third parties for the customer-provided content on our sites, particularly in jurisdictions outside the United States where laws governing Internet transactions are unsettled, may increase. If we become liable for information provided by our customers and carried on our service in any jurisdiction in which we operate, we could be directly harmed and we may be forced to implement new measures to reduce our exposure to this liability, including expending substantial resources or discontinuing certain service offerings, which could harm our business.

~~Problems with or price increases by third parties who provide services to us or to our customers could harm our business.~~

A number of third parties provide services to us or to our customers. We are dependent on caching services that make our sites load faster and the processing companies and banks that link us to the payment card and bank clearing networks to process transactions, among others. We are subject to, among other things, increases in interchange fees and assessments that payment card networks such as Visa and MasterCard charge for each transaction using one of their cards (which our payment card processors

have the right to pass on to us), as well as changes in payment card network operating rules, including special operating rules for Internet payment services providers, such as PayPal. Similarly, we rely on unaffiliated lenders to make the consumer and other loans originated through the PayPal Credit products and also rely heavily on third parties to operate our services, including merchant processors and payment gateways to process transactions and third parties that provide loan receivable tracking and customer statements processing. Financial or regulatory issues, labor issues (e.g., strikes, lockouts, or work stoppages), or other problems that prevent these companies from providing services to us or our customers could harm our business.

Price increases or financial penalties by, or service terminations, disruptions or interruptions at, companies that provide services to us and our customers and clients could also make it more difficult for our merchants to complete transactions, thereby harming our business. Some third parties who provide services to us may have or gain market power and be able to increase their prices to us without competitive constraint.

We have outsourced certain functions to third-party providers, including some customer support and product development functions, which are critical to our operations. If our service providers do not perform satisfactorily, our operations could be disrupted, which could result in customer dissatisfaction and could harm our business.

There can be no assurance that third parties who provide services directly to us or our customers will continue to do so on acceptable terms, or at all. If any third parties were to stop providing services to us or our customers on acceptable terms, including as a result of bankruptcy, we may be unable to procure alternatives from other third parties in a timely and efficient manner and on acceptable terms, or at all.

~~Our developer platforms, which are open to merchants and third-party developers, subject us to additional risks.~~

We provide third-party developers with access to application programming interfaces, software development kits and other tools designed to allow them to produce applications for use, with a particular focus on mobile applications. There can be no assurance that merchants or third-party developers will develop and maintain applications and services on our open platforms on a timely basis or at all, and a number of factors could cause such third-party developers to curtail or stop development for our platforms. In addition, our business is subject to many regulatory restrictions. It is possible that merchants and third-party developers who utilize our development platforms or tools could violate these regulatory restrictions and we may be held responsible for such violations, which could harm our business.

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

We have announced several retail point of sale solutions, which enable merchants to accept payments using a payments card reader attached to, or otherwise communicating with, a mobile device or to scan payment cards and codes using the mobile device’s embedded camera, and which ~~will~~ enable consumers to use their mobile devices to pay at the point of sale. ToWe recently announced that we have entered into a strategic partnership with Visa, Inc. to further expand our relationship with Visa in a way that will make it easier for merchants and consumers to choose to pay with Visa credit and debit cards. As part of the ~~extent~~agreement, we will gain access to Visa’s tokenization services in the US for in-store point-of-sale PayPal transactions, which we expect will increase the number of point of sale transactions that we process. As we continue to expand our product and service offerings at the retail point of sale, we will face additional risks, including:

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

significant competition at the retail point of sale, particularly from established payment card providers such as Visa, MasterCard and American Express, many of which have substantially greater resources than we do;

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

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

exposure to ~~new, revised or~~ additional laws, rules and regulations;

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

lower operating income than our other payment solutions.

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

Our success largely depends on key personnel. Because competition for our key employees is intense, we may not be able to attract, retain, and develop the highly skilled employees we need to support our business. The loss of senior management or other key personnel could harm our business.

Our future performance depends substantially on the continued services of our senior management and other key personnel, including engineering and product development personnel, and our ability to attract, retain, and motivate such personnel. Competition for key personnel is intense, especially in the Silicon Valley where our corporate headquarters are located, and we may be unable to successfully attract, integrate, or retain sufficiently qualified key personnel. In making employment decisions, particularly in high-technology and payments industries, job candidates often consider the value of the equity awards they would receive in connection with their employment, and fluctuations in our stock price may make it more difficult to attract, retain, and motivate employees. In addition, we do not have long-term employment agreements with any of our key personnel and do not maintain any “key person” life insurance policies. The loss of the services of any of our senior management or other key personnel, or our inability to attract highly qualified senior management and other key personnel, could harm our business.

~~Risks Related to the Separation and Our Operation as an Independent Publicly Traded Company~~

~~We may not achieve some or all of the expected benefits of the separation, and the separation could harm our business.~~

We may not be able to achieve the full strategic and financial benefits expected to result from the separation of PayPal from eBay Inc., which we refer to as the separation, or such benefits may be delayed or not occur at all. The separation and distribution were expected to provide the following benefits, among others: enhanced strategic and management focus; better ability to form strategic relationships; faster decision-making; more efficient allocation of capital; alignment of incentives with performance objectives; direct access to the capital markets; and a distinct investment identity. We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:

~~following the separation, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of eBay;~~

~~following the separation, our business is less diversified than eBay’s business prior to the separation; and~~

~~following the separation, regulatory requirements may inhibit or prevent certain activities that the parties intend to continue to preserve operating synergies.~~

~~If we fail to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, our business could be harmed.~~

If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code (the “Code”), eBay, PayPal and eBay stockholders could be subject to significant tax liabilities and, in certain circumstances, we could be required to indemnify eBay for material taxes pursuant to indemnification obligations under the tax matters agreement.

eBay has received an opinion from its outside legal counsel regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code. The opinion was based on and relied on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of eBay and PayPal, including those relating to the past and future conduct of eBay and PayPal. If any of these representations, statements or undertakings are, or become, inaccurate or incomplete, or if eBay or PayPal breach any of their respective covenants in the separation documents, the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized.

Notwithstanding the opinion of counsel, the IRS could determine that the distribution, together with certain related transactions, should be treated as a taxable transaction if the IRS determines that any of these representations, assumptions, or undertakings upon which such opinion was based are incorrect or have been violated or if the IRS disagrees with the conclusions in the opinion of counsel. An opinion of counsel is not binding on the IRS or any court and there can be no assurance that the IRS will not challenge the conclusions reached in the opinion. The IRS did not provide any opinion in advance of the separation that our proposed transaction will be tax-free.

If the distribution, together with certain related transactions, failed to qualify as a transaction that is generally tax-free under Sections 368(a)(1)(D) and 355 of the Code, in general, eBay would recognize taxable gain as if it had sold the PayPal

common stock in a taxable sale for its fair market value, eBay stockholders who receive PayPal common stock in the distribution may be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares and we could incur significant liabilities.

We may not be able to engage in desirable strategic or capital-raising transactions following the separation. In addition, we could be liable for adverse tax consequences resulting from engaging in significant strategic or capital-raising transactions.

To preserve the tax-free treatment to eBay of the separation and the distribution, under the tax matters agreement that we entered into with eBay, for a period of time following the distribution, we are generally prohibited from taking certain actions that prevent the distribution and related transactions from qualifying as a transaction that is generally tax-free, for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code. These restrictions may limit our ability to pursue certain strategic transactions or other transactions that may maximize the value of our business.

We have no history of operating as an independent company in our current form, and our historical financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

The condensed combined and consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q refers to our business as operated by and integrated with eBay, and were derived from the consolidated financial statements and accounting records of eBay. Accordingly, this financial information does not necessarily reflect the financial condition, results of operations, or cash flows that we would have achieved as a separate, independent, publicly traded company during the periods presented or those that we will achieve in the future primarily as a result of the factors described below:

Prior to the separation, our business was operated by eBay as part of its broader corporate organization, rather than as an independent company. eBay or its affiliates performed various corporate functions for us, such as legal, finance, treasury, accounting, tax, auditing, human resources, and public affairs. Our historical financial results reflect allocations of corporate expenses from eBay for such functions, which are likely to be less than the expenses we would have incurred had we operated as a separate publicly traded company.

Prior to the separation, our business was integrated with the other businesses of eBay. Historically, we shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although we have entered into arm’s length agreements with eBay, including the operating agreement, these arrangements may not retain or fully capture the benefits that we have enjoyed as a result of being integrated with eBay and may result in our paying higher charges than in the past for these services. This could have an adverse effect on our results of operations and financial condition.

We may lose certain synergies and benefits we enjoyed as a result of being a part of eBay. As a part of eBay, we benefited from, among other things, the acquisition of new customers from eBay, capital to fund acquisitions, investments, and credit, and data from eBay that helps us to manage risks and maintain a low loss rate. In addition, being a part of eBay enabled us to leverage eBay’s technology capabilities, data, commerce platforms and relationships with retailers, brands and large merchants worldwide. The loss of these synergies and benefits could adversely affect our results of operations and financial condition.

Generally, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, were historically satisfied as part of the corporate-wide cash management policies of eBay. Following the separation, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, or through strategic relationships or other arrangements, which may or may not be available and may be more costly.

~~Following the separation, the cost of capital for our business may be higher than eBay’s cost of capital prior to the separation.~~

Other significant changes may occur in our cost structure, management, financing, and business operations as a result of operating as an independent company separate from eBay. For additional information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the condensed combined and consolidated financial statements and accompanying notes included in Part I of this Quarterly Report on Form 10-Q.

~~eBay remains a significant source of our revenues after the distribution.~~

After the distribution, we continue to derive a significant amount of revenues from eBay. If the operating agreement expires or is terminated prior to its expiration, or if there is a significant change in our relationship with eBay, including if eBay becomes a merchant of record, eliminates or modifies any of its risk management or customer protection programs, directs transactions to a different provider of payment services or offers eBay customers more payment options, our business could be harmed.

eBay may fail to perform under various transaction agreements that were executed as part of the separation or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.

In connection with the separation, we entered into a separation and distribution agreement with eBay as well as various other agreements, including an operating agreement, colocation services agreements, transition services agreements, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement, a data sharing addendum, and a product development agreement. The separation agreement, the tax matters agreement, the employee matters agreement, and the intellectual property matters agreement determine the allocation of assets and liabilities (including by means of licensing) between the companies following the separation for those respective areas and include any necessary indemnifications related to liabilities and obligations. The operating agreement, the colocation services agreements and the data sharing addendum establish certain commercial relationships between eBay and us related to payment processing, credit, information technology infrastructure and data sharing. The transition services agreements provide for the performance of certain services by each company for the benefit of the other for a limited period of time after the separation. We will rely on eBay to satisfy its performance and payment obligations under these agreements. If eBay is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties or losses. If we do not have in place our own systems and services, or if we do not have agreements with other providers of these services once these transaction agreements expire or terminate, we may not be able to operate our business effectively and our profitability may decline.

~~Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we are subject following the distribution.~~

Our financial results previously were included within the consolidated results of eBay, and its reporting and control systems were appropriate for subsidiaries of a public company. Prior to the distribution, we were not directly subject to reporting and other requirements of the Securities Exchange Act of 1934, as amended, and Section 404 of the Sarbanes-Oxley Act of 2002. After the distribution, we are subject to such reporting and other requirements, which will require, among other things, annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. These and other obligations will place significant demands on our management, administrative, and operational resources, including accounting and information technology resources. To comply with these requirements, we anticipate that we will need to upgrade our systems, including duplicating computer hardware infrastructure, implement additional financial and management controls, reporting systems and procedures, and hire additional accounting, finance and information technology staff. If we are unable to do this in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired and our business could be harmed.

~~After the separation, certain of our directors may have actual or potential conflicts of interest because of their previous or continuing positions at eBay.~~

Because of their current or former positions with eBay, certain of our directors own eBay common stock and equity awards. Following the separation, even though our board of directors consists of a majority of directors who are independent, some of our directors continue to have a financial interest in eBay common stock and equity awards. In addition, one of our directors continues to serve on the eBay board of directors. Continuing ownership of eBay common stock and equity awards or service as a director at both companies could create, or appear to create, potential conflicts of interest if PayPal and eBay were to have disagreements about the agreements between them or face decisions that could have different implications for PayPal and eBay.

~~Risks Related to Our Common Stock~~

~~The price of our common stock may fluctuate significantly.~~

~~The price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:~~

~~actual or anticipated fluctuations in our operating results;~~

~~changes in earnings estimated by securities analysts or our ability to meet those estimates;~~

~~the change in our stockholder base following the distribution;~~

~~the operating and stock price performance of comparable companies;~~

~~changes to the regulatory and legal environment under which we operate; and~~

~~market conditions in the payments industry, the industries of merchants and the domestic and worldwide economy as a whole.~~

PayPal’s amended and restated certificate of incorporation designates the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by PayPal’s stockholders, which could discourage lawsuits against PayPal and PayPal’s directors and officers.

PayPal’s amended and restated certificate of incorporation provides that unless the corporation otherwise determines, the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of PayPal, any action asserting a claim of breach of a fiduciary duty owed by any director or officer of PayPal to PayPal or PayPal’s stockholders, creditors or other constituents, any action asserting a claim against PayPal or any director or officer of PayPal arising pursuant to any provision of the Delaware General Corporation Law or PayPal’s amended and restated certificate of incorporation or bylaws, or any action asserting a claim against PayPal or any director or officer of PayPal governed by the internal affairs doctrine. This exclusive forum provision may limit the ability of PayPal’s stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with PayPal or PayPal’s directors or officers, which may discourage such lawsuits against PayPal and PayPal’s directors and officers. Alternatively, if a court outside of Delaware were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, PayPal could incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect PayPal’s business, financial condition or results of operations.

Certain provisions in PayPal’s amended and restated certificate of incorporation and bylaws may prevent or delay an acquisition of PayPal, which could decrease the trading price of PayPal common stock.

PayPal’s amended and restated certificate of incorporation and amended and restated bylaws contain certain provisions that may have the effect of deterring coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and by encouraging prospective acquirers to negotiate with PayPal’s board of directors rather than to attempt a hostile takeover. These provisions include, among others:

~~rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;~~

the fact that directors may not be elected, removed or replaced at stockholder-requested special meetings unless a person, entity or group owns at least a majority of PayPal’s outstanding common stock;

~~the right of PayPal’s board to issue preferred stock without stockholder approval; and~~

~~the ability of PayPal’s directors, and not stockholders, to fill vacancies on PayPal’s board of directors in most circumstances.~~

PayPal has also elected not to be governed by Section 203 of the DGCL, which provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliates becomes the holder of more than 15% of the corporation’s outstanding voting stock. PayPal’s amended and restated certificate of incorporation, however, contains a provision that generally mirrors Section 203 of the DGCL, except that there will be a 20% threshold instead of the 15% provided for by the DGCL. These provisions could delay or prevent a change of control that PayPal’s stockholders may favor.

Certain of the above provisions were added pursuant to the agreement between eBay Inc. and certain entities under the control of Carl C. Icahn. These provisions are not intended to make PayPal immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and may delay or prevent an acquisition that PayPal’s board of directors determines is not in the best interests of PayPal and PayPal’s stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

In addition, an acquisition or further issuance of PayPal’s stock (including preferred stock) could trigger the application of Section 355(e) of the Code. For a discussion of Section 355(e), see “Material U.S. Federal Income Tax Consequences” in our registration statement on Form 10, as amended, filed with the Securities and Exchange Commission. Under the tax matters agreement, in such circumstances, PayPal would be required to indemnify eBay for any resulting taxes, and this indemnity obligation might discourage, delay or prevent a change of control that PayPal’s stockholders may consider favorable. Please refer to “Certain Relationships and Related Person Transactions” and “Description of PayPal’s Capital Stock” in our registration statement on Form 10, as amended, filed with the Securities and Exchange Commission for a more detailed description of these agreements and provisions.


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

~~Not applicable.~~In January 2016, our Board of Directors authorized a stock repurchase program that provides for the repurchase of up to $2 billion of our common stock, with no expiration from the date of authorization. This stock repurchase program is intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, to be used to make opportunistic repurchases of our common stock to reduce outstanding share count. Any share repurchases under our stock repurchase program may be made through open market transactions, block trades, privately negotiated transactions or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives. However, any stock repurchases are subject to market conditions and other uncertainties and we cannot predict if or when any stock repurchases will be made. Moreover, we may terminate our stock repurchase program at any time without notice.

The stock repurchase activity under our stock repurchase program during the six months ended June 30, 2016 is summarized as follows:



	Shares Repurchased	Average Price Paid per Share⁽¹⁾		Value of Shares Repurchased		Remaining Amount Authorized
	(In millions, except per share amounts)
Authorization of plan in January 2016						$	2,000
Period ended January 31, 2016	—	—		—		—
Period ended February 29, 2016	17	$	35.27	$	596	(596		)
Period ended March 31, 2016	—	—		—		—
Period ended April 30, 2016	—	—		—		—
Period ended May 31, 2016	8	38.67		300		(300		)
Period ended June 30, 2016	—	—		—		—
Balance as of June 30, 2016	25			$	896	$	1,104

⁽¹⁾Average price paid per share includes broker commissions.

These repurchased shares of common stock were recorded as treasury stock and were accounted for under the cost method. No repurchased shares of common stock have been retired.


Item 3:	Defaults Upon Senior Securities

Not applicable.


Item 4:	Mine Safety Disclosures

Not applicable.


Item 5:	Other Information

Not applicable.


Item 6:	Exhibits

The information required by this Item is set forth in the Index of Exhibits that follows the signature page of this Quarterly Report.

SIGNATURES

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



		PayPal Holdings, Inc.
		Principal Executive Officer:

		By:	/s/ Daniel H. Schulman
			Daniel H. Schulman
			President and Chief Executive Officer
Date:	~~October 29, 2015~~July 26, 2016
		Principal Financial Officer:

		By:	/s/ John D. Rainey
			John D. Rainey
			Senior Vice President, Chief Financial Officer
Date:	~~October 29, 2015~~July 26, 2016
		Principal Accounting Officer:

		By:	/s/ Aaron A. Anderson
			Aaron A. Anderson
			Vice President, Chief Accounting Officer
Date:	~~October 29, 2015~~July 26, 2016

INDEX TO EXHIBITS




Exhibit 10.01+*		~~Letter Agreement dated July 13,~~PayPal Holdings, Inc. Amended and Restated 2015 ~~between Marcia Morales-Jaffe and Registrant~~Equity Incentive Award Plan
Exhibit 10.02+*		~~Letter~~Amended and Restated PayPal Employee Incentive Plan
Exhibit 10.03		Amendment dated June 30, 2016, to the Operating Agreement ~~dated July 29, 2015~~by and between ~~John Rainey~~Registrant, eBay International AG, PayPal Holdings, Inc., PayPal, Inc., PayPal Pte. Ltd. and ~~Registrant~~PayPal Payments Pte. Holdings S.C.S.
Exhibit 31.01		Certification of Registrant's Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.02		Certification of Registrant's Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.01		Certification of Registrant's Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.02		Certification of Registrant's Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

+ Indicates a management contract or compensatory plan or arrangement.

* Filed as an exhibit to Registrant’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 14, 2016 and incorporated herein by reference.

7161



Delaware	47-2989869
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

2211 North First Street San Jose, California	95131
(Address of Principal Executive Offices)	(Zip Code)



Large accelerated filer	ý	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o



			Page Number
Part I.	Financial Information		3
	Item 1.	Condensed Consolidated Balance Sheet	3
		Condensed Combined and Consolidated Statement of Income	4
		Condensed Combined and Consolidated Statement of Comprehensive Income	5
		Condensed Combined and Consolidated Statement of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
	Item 4.	Controls and Procedures	50
Part II.	Other Information		51
	Item 1.	Legal Proceedings	51
	Item 1A.	Risk Factors	51
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Signatures			60
Exhibit Index			61


	September 30, 2015		December 31, 2014		June 30, 2016			December 31, 2015
	(In millions, except par value)				(In millions, except par value)
	(Unaudited)				(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,880	$	2,201	$	2,018		$	1,393
Short-term investments	2,419		29		2,939			2,018
Accounts receivable, net	173		65		167			137
Loans and interest receivable, net	3,602		3,586
Loans and interest receivable, net of allowances of $279 in 2016 and $233 in 2015					4,507			4,184
Funds receivable and customer accounts	11,802		10,612		13,034			12,261
Notes and receivables from affiliates	—		694
Other current assets	678		378
Prepaid expenses and other current assets					792			655
Total current assets	20,554		17,565		23,457			20,648
Long-term investments	2,392		31		1,315			2,348
Property and equipment, net	1,298		922		1,412			1,344
Goodwill	3,415		3,189		4,069			4,069
Intangible assets, net	174		156		281			358
Other assets	63		54		97			114
Total assets	$	27,896	$	21,917	$	30,631		$	28,881
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	114	$	115	$	169		$	145
Funds payable and amounts due to customers	11,802		10,612		13,834			12,261
Notes and payables to affiliates	—		1,093
Accrued expenses and other current liabilities	1,089		1,434		1,181			1,179
Income taxes payable	67		29		39			32
Total current liabilities	13,072		13,283		15,223			13,617
Long-term liabilities	1,610		386
Deferred tax liability and other long-term liabilities					1,591			1,505
Total liabilities	14,682		13,669		16,814			15,122
Commitments and contingencies (Note 10)
Commitments and contingencies (Note 11)
Equity:
Net parent investment	—		8,138
Common stock, $0.0001 par value; 4,000 shares authorized; 1,221 and 1,218 outstanding	—		—
Common stock, $0.0001 par value; 4,000 shares authorized; 1,207 and 1,224 outstanding					—			—
Treasury stock at cost, 25 shares as of June 30, 2016					(896		)	—
Additional paid-in-capital	12,910		—		13,305			13,100
Retained earnings	301		—		1,356			668
Accumulated other comprehensive income	3		110
Accumulated other comprehensive income (loss)					52			(9		)
Total equity	13,214		8,248		13,817			13,759
Total liabilities and equity	$	27,896	$	21,917	$	30,631		$	28,881


	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014			2016		2015		2016		2015
	(In millions, except per share data)									(In millions, except per share data)
	(Unaudited)									(Unaudited)
Net revenues	$	2,258	$	1,975	$	6,692	$	5,832		$	2,650	$	2,297	$	5,194	$	4,434
Operating expenses:
Transaction expense	651		537		1,860		1,576			810		634		1,562		1,209
Transaction and loan losses	201		180		564		453			255		185		510		363
Customer support and operations	317		257		900		775			318		278		614		527
Sales and marketing	235		267		716		735			250		234		483		456
Product development	230		232		695		651			209		202		404		387
General and administrative	141		101		414		338			261		215		492		432
Depreciation and amortization	153		129		444		384			176		150		351		291
Restructuring	—		—		49		—			—		1		—		49
Total operating expenses	1,928		1,703		5,642		4,912			2,279		1,899		4,416		3,714
Operating income	330		272		1,050		920			371		398		778		720
Other income (expense), net	20		4		20		(6		)	9		1		24		—
Income before income taxes	350		276		1,070		914			380		399		802		720
Income tax expense	49		42		209		781			57		94		114		160
Net income	$	301	$	234	$	861	$	133		$	323	$	305	$	688	$	560

Net income per share:
Basic	$	0.25	$	0.19	$	0.71	$	0.11		$	0.27	$	0.25	$	0.57	$	0.46
Diluted	$	0.25	$	0.19	$	0.70	$	0.11		$	0.27	$	0.25	$	0.56	$	0.46

Weighted average shares:
Basic	1,221		1,218		1,221		1,218			1,210		1,218		1,213		1,218
Diluted	1,227		1,224		1,227		1,224			1,215		1,224		1,220		1,224



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



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



	Three Months Ended June 30, 2015
In millions	As Reported		Adjustments		Revised
Transaction expense	$	634	—		$	634
Transaction and loan losses	185		—		185
Customer support and operations	308		(30	)	278
Sales and marketing	245		(11	)	234
Product development	241		(39	)	202
General and administrative	135		80		215
Depreciation and amortization	150		—		150
Restructuring	1		—		1
Total operating expenses	$	1,899	—		$	1,899



	Six Months Ended June 30, 2015
In millions	As Reported		Adjustments		Revised
Transaction expense	$	1,209	—		$	1,209
Transaction and loan losses	363		—		363
Customer support and operations	583		(56	)	527
Sales and marketing	481		(25	)	456
Product development	465		(78	)	387
General and administrative	273		159		432
Depreciation and amortization	291		—		291
Restructuring	49		—		49
Total operating expenses	$	3,714	—		$	3,714



	December 31, 2014		Goodwill Acquired		Adjustments			September 30, 2015
Total Goodwill	$	3,189	$	231	$	(5	)	$	3,415


	September 30, 2015								December 31, 2014								June 30, 2016								December 31, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Useful Life (Years)
	(In millions, except years)																(In millions, except years)
Intangible assets:
Customer lists and user base	$	533	$	(492	)	$	41	5	$	520	$	(477	)	$	43	6	$	605	$	(524	)	$	81	4	$	605	$	(501	)	$	104	4
Marketing related	181		(141		)	40		3	181		(117		)	64		3	197		(170		)	27		3	197		(150		)	47		3
Developed technologies	213		(168		)	45		3	167		(153		)	14		3	245		(190		)	55		3	245		(176		)	69		3
All other	146		(98		)	48		5	105		(70		)	35		5	243		(125		)	118		5	243		(105		)	138		5
Intangible assets, net	$	1,073	$	(899	)	$	174		$	973	$	(817	)	$	156		$	1,290	$	(1,009	)	$	281		$	1,290	$	(932	)	$	358


Fiscal years:
Remaining 2015	$	24
2016	88
Remaining 2016			$	72
2017	39		101
2018	19		68
2019	4		23
Thereafter:	—
2020			17
	$	174	$	281



	June 30, 2016		December 31, 2015
	(In millions)
Cash and cash equivalents	$	4,815	$	5,245
Government and agency securities	5,209		4,305
Time deposits	504		830
Corporate debt securities	599		180
Funds receivable	1,907		1,701
Total funds receivable and customer accounts	$	13,034	$	12,261



	June 30, 2016
	Gross Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In millions)
Government and agency securities	$	4,736	$	1	$	—	$	4,737
Time deposits	504		—		—		504
Total	$	5,240	$	1	$	—	$	5,241



	June 30, 2016
	(In millions)
One year or less	$	5,014
One year through two years	227
Total	$	5,241


Description	Balances at September 30, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Balances at June 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)						(In millions)
Assets:
Cash and cash equivalents	$	1,880	$	879	$	1,001	$	529	$	—	$	529
Short-term investments:
Restricted Cash	19		19		—		17		17		—
Corporate debt securities	2,211		—		2,211		2,553		—		2,553
Government and agency securities	180		—		180		257		—		257
Time deposits	9		—		9		112		—		112
Total short-term investments	$	2,419	$	19	$	2,400	$	2,939	$	17	$	2,922
Funds receivable and customer accounts	6,481		—		6,481		6,912		—		6,912
Derivatives	92		—		92		204		—		204
Long-term investments:
Restricted Cash							6		6		—
Corporate debt securities	2,366		—		2,366		1,249		—		1,249
Government and agency securities							10		—		10
Total long-term investments							1,265		6		1,259
Total financial assets	$	13,238	$	898	$	12,340	$	11,849	$	23	$	11,826
Liabilities:
Derivatives	$	25	$	—	$	25	$	85	$	—	$	85


Description	Balances at December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Balances at December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
	(In millions)						(In millions)
Assets:
Cash and cash equivalents	$	2,201	$	2,201	$	—	$	406	$	—	$	406
Short-term investments:
Restricted Cash							18		18		—
Corporate debt securities							1,998		—		1,998
Time deposits	29		—		29		2		—		2
Total short-term investments	29		—		29		2,018		18		2,000
Funds receivable and customer accounts	4,161		—		4,161		6,978		—		6,978
Derivatives	135		—		135		97		—		97
Long-term investments:
Restricted Cash							8		8		—
Corporate debt securities							2,314		—		2,314
Total long-term investments							2,322		8		2,314
Total financial assets	$	6,526	$	2,201	$	4,325	$	11,821	$	26	$	11,795
Liabilities:
Derivatives	$	7	$	—	$	7	$	25	$	—	$	25


	Balance Sheet Location	September 30, 2015		December 31, 2014		Balance Sheet Location	June 30, 2016		December 31, 2015
		(In millions)					(In millions)
Derivative Assets:
Foreign exchange contracts designated as cash flow hedges	Other Current Assets	$	65	$	128	Other Current Assets	$	107	$	59
Foreign exchange contracts not designated as hedging instruments	Other Current Assets	27		7		Other Current Assets	97		38
Total derivative assets		$	92	$	135		$	204	$	97

Derivative Liabilities:
Foreign exchange contracts designated as cash flow hedges	Other Current Liabilities	$	6	$	2	Other Current Liabilities	$	7	$	2
Foreign exchange contracts not designated as hedging instruments	Other Current Liabilities	19		5		Other Current Liabilities	78		23
Total derivative liabilities		$	25	$	7		$	85	$	25

Net fair value of derivative instruments		$	67	$	128		$	119	$	72



	December 31, 2014		Amount of gain recognized in other comprehensive income (effective portion)	Amount of gain reclassified from accumulated other comprehensive income to net revenue (effective portion)	September 30, 2015
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	126	83	150	$	59



	December 31, 2013			Amount of (loss) recognized in other comprehensive income (effective portion)	Amount of (loss) reclassified from accumulated other comprehensive income to net revenue (effective portion)		September 30, 2014
	(In millions)
Foreign exchange contracts designated as cash flow hedges	$	(91	)	105	(56	)	$	70


	Nine Months Ended September 30,						June 30, 2016									June 30, 2015
	2015			2014			Consumer Loans Receivable			Interest Receivable			Total Allowance			Consumer Loans Receivable			Interest Receivable			Total Allowance
	(In millions)						(In Millions)
Balance as of January 1	$	188		$	145		$	179		$	32		$	211		$	158		$	30		$	188
Reclassification from loans receivable to loans held for sale	(22		)	—			—			—			—			(22		)	—			(22		)
Provisions	231			215			179			49			228			127			34			161
Charge-offs	(227		)	(209		)	(157		)	(51		)	(208		)	(127		)	(40		)	(167		)
Recoveries	18			20			18			—			18			14			—			14
Balance as of September 30	$	188		$	171
Balance as of June 30							$	219		$	30		$	249		$	150		$	24		$	174



September 30, 2015
(In millions)
Within Original Period		30 - 59 Days Greater		60 - 89 Days Greater		90 - 180 Days Greater		180+ Days with minimum payment in last 90 days		Total Past Original Expected Repayment		Total Merchant Receivables
$	284	$	36	$	15	$	15	$	2	$	68	$	352



December 31, 2015
(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 Merchant Receivables
$	367	$	24	$	13	$	15	$	2	$	54	$	421



	Options		Weighted Average Grant-Date Fair Value (per share)
	(In thousands, except per share amounts)
Outstanding at January 1, 2015	2,409
Granted and assumed	1,778		$	8.51
Exercised	(3,029	)
Forfeited/expired/canceled	(204	)
Shares granted as a result of conversion and employee transitions	4,658
Outstanding at September 30, 2015	5,612



	Options
	(In thousands)
Outstanding at January 1, 2016	6,008
Granted	124
Exercised	(731	)
Forfeited/expired/canceled	(165	)
Outstanding at June 30, 2016	5,236



	Units		Weighted Average Grant-Date Fair Value (per share)
	(In thousands, except per share amounts)
Outstanding at January 1, 2015	14,715
Awarded and assumed	12,223		$	35.85
Vested	(7,673	)
Forfeited	(3,592	)
Shares granted as a result of conversion and employee transitions	12,051
Outstanding at September 30, 2015	27,724
Expected to vest	23,482



	Three Months Ended September 30, 2015		Nine Months Ended September 30, 2015
	(In millions)
Employee severance and benefits	$	—	$	49
Total	$	—	$	49



	Employee Severance and Benefits			Other Associated Costs		Total
	(In millions)
Accrued liability as of January 1, 2015	$	—		$	—	$	—
Charges	49			—		49
Payments	(47		)	—		(47		)
Accrued liability as of September 30, 2015	$	2		$	—	$	2



	Unrealized Gains (Losses) on Cash Flow Hedges		Unrealized Gains (Losses) on Investments			Foreign Currency Translation			Estimated tax (expense) benefit			Total
	(In millions)
Beginning balance as of March 31, 2016	$	21	$	(4	)	$	(45	)	$	1		$	(27	)
Other comprehensive income (loss) before reclassifications	88		9			(5		)	(4		)	88
Amount of gain reclassified from accumulated other comprehensive income	9		—			—			—			9
Net current period other comprehensive income	79		9			(5		)	(4		)	79
Ending balance as of June 30, 2016	$	100	$	5		$	(50	)	$	(3	)	$	52


Details about Accumulated Other Comprehensive Income Components	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income					Affected Line Item in the Statement of Income	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement of Income
	Three Months Ended September 30,						Three Months Ended June 30,
	2015		2014				2016		2015
	(In millions)						(In millions)
Gains (losses) on cash flow hedges-foreign exchange contracts	$	38	$	(16	)	Net revenues
Gains on cash flow hedges-foreign exchange contracts							$	9	$	62	Net revenues
Unrealized losses on investments							$	—	$	—	Other income (expense), net
	$	38	$	(16	)	Income before income taxes	$	9	$	62	Income before income taxes
	—		—			Income tax expense	—		—		Income tax expense
Total reclassifications for the period	$	38	$	(16	)	Net income/(loss)	$	9	$	62	Net income


	Three Months Ended September 30,						Percent Increase/(Decrease)			Nine Months Ended September 30,								Percent Increase/(Decrease)		Three Months Ended June 30,								Percent Increase/(Decrease)		Six Months Ended June 30,						Percent Increase/(Decrease)
	2015			2014					2015				2014				2016				2015					2016				2015						Percent Increase/(Decrease)
	(In millions, except percentages)																			(In millions, except percentages)
Net revenues	$	2,258		$	1,975		Percent Increase/(Decrease)	14	%		$	6,692			$	5,832		Percent Increase/(Decrease)			15	%	$	2,650			$	Percent Increase/(Decrease)	2,297		15	%	$	5,194		$	4,434	17	%
Operating expenses	1,928			1,703			13	%		5,642				4,912				15	%	2,279				1,899				20	%	4,416			3,714			19	%
Operating income	330			272			21	%		1,050				920				14	%	371				398				(7	)%	778			720			8	%
Operating margin																				14		%		17		%		**		15		%	16		%	**
Income tax expense	49			42			17	%		209				781				(73	)%	57				94				(39	)%	114			160			(29	)%
Effective tax rate	14		%	15		%	**			20		%		85		%		**		15		%		24		%		**		14		%	22		%	**
Net income	$	301		$	234		29	%		$	861			$	133			547	%	$	323			$	305			6	%	$	688		$	560		23	%
Net income per diluted share⁽¹⁾⁽²⁾	$	0.25		$	0.19		28	%		$	0.70			$	0.11			**		$	0.27			$	0.25			7	%	$	0.56		$	0.46		23	%



	Three Months Ended June 30, 2016			Six Months Ended June 30, 2016
	(in millions)
Unfavorable impact to net revenues (exclusive of hedging impact)	$	(25	)	$	(72	)
Hedging impact	9			41
Unfavorable impact to net revenues	(16		)	(31		)
Favorable impact to operating expense	11			41
Unfavorable impact to operating income	$	(5	)	$	10


	September 30, 2015		December 31, 2014		June 30,		June 30,
Percentage of Loans Receivable with FICO scores > 680	54	%	54	%
Percentage of Loans Receivable with FICO scores < 599	10	%	9	%
					2016		2015
Percentage of Loans Receivable with FICO scores > 680⁽¹⁾					53.2	%	54.2	%
Percentage of Loans Receivable with FICO scores < 599⁽¹⁾					10.5	%	9.6	%
Percent of Loans Receivable current	90	%	90	%	90.3	%	90.0	%
Percent of Loans Receivable > 90 days outstanding	4	%	4	%	3.7	%	3.6	%
Net charge off rate⁽²⁾					6.3	%	5.8	%