It's the prisoner's dilemma.
Merchants using PayPal can't charge more on PayPal transactions so they increase the price of all their items for all customers. For card transactions they pocket the extra profit and likely then use it to pay PayPal fees and refunds. A similar mechanism happens for credit card chargebacks.
All customers pay for this feature.
When given the choice between credit card or PayPal, customers can get PayPal protection or not for the same price. If they use PayPal they perpetuate the story that people prefer PayPal and contribute to generally higher prices to account for PayPal refunds, mostly damaging themselves in the long run (given we already have laws in place that force merchants to refund / return items and most merchants are not scammers) and benefitting PayPal.
It seems like we need a law that requires a credit card processing fee to be shown on the receipt like sales tax. People would then start gravitating to the cheapest processors due to competition being obvious to consumers.
All customers pay for this feature.
When given the choice between credit card or PayPal, customers can get PayPal protection or not for the same price. If they use PayPal they perpetuate the story that people prefer PayPal and contribute to generally higher prices to account for PayPal refunds, mostly damaging themselves in the long run (given we already have laws in place that force merchants to refund / return items and most merchants are not scammers) and benefitting PayPal.