It pulls from your Google Wallet balance, which can be funded when friends send you money, or you can load money on to it using a bank account or credit/debit card (2.9% fee applies)
Yeah, the fees credit cards charge merchants (in part, to fund reward programs) is why Google has to charge you money to transfer funds into Wallet from other credit cards (otherwise, they'd be losing money when your money goes from a CC into Wallet and out to pay for something.)
Note that there is no fee when the source is not a credit card.
Because Discover makes far more than that on people who owe them credit and don't pay it off immediately, so it's in their interest to get more people to owe them credit in hopes that they'll keep a running balance.