I am facing a similar situation, and having a very negative experience with PayPal resolving it.
I made a purchase on Etsy using PayPal, and selected the wrong payment source - I usually keep a low balance in my checking account, so I wanted to use a credit card. I had no problem with the seller processing a refund to me, and then we did complete the transaction with payment from my credit card. This all occurred in 24-48 hours.
Subsequently I received an overdraft notice from my bank, and the refunded amount still did not show in my PayPal balance.
I called PayPal customer service, and the operator was actually very helpful (so it seemed) and explained that the temporary hold should be complete within 3-5 days of the transaction, when the refund should post to my balance.
Today it has been more than 7 days, still no refund has posted. I called again and spoke to a PayPal customer service rep. She explained that since the payment originally went through as coming from my bank account, and they received "insufficient funds" notice from my bank, they automatically process a 2nd request for funds from my bank which could take 11 business days from the original request (!). If they still get an NSF notice, then the payment will stop, and the temporary hold will end, and I should get my refund. And, according to the rep, there is no way for PayPal to cancel the 2nd payment request to the bank - it is basically a lengthy, automatic, archaic process. Meanwhile, you could face a second overdraft fee...
It seems the only way to stop the 2 payment requests to your bank is to contact your bank as soon as possible and do a Stop Payment. That should trigger an end to the temporary hold, and will prevent overdraft fees from your bank of that is the case. Do not rely on PayPal to cancel the process or take care of it somehow.
The second payment request has now gone through my bank account (and paid from my balance there) so I should be getting my refund now.
My advice: stay on top of your bank account statement online, because it is more up to date than your PayPal balance, and be proactive about putting a Stop Payment on the transaction if you need to. And of course, follow up with PayPal Customer Service to make sure everything is on track.
It is ridiculous.
I don't know about the conspiracy theories I've seen elsewhere on the boards, that PayPal is making interest income by holding our funds, since in my case they are probably spending more to contact my bank multiple times and answer my multiple phone calls, but I do know that it is very inconvenient, archaic, and frustrating for us users - and if enough of us are **bleep** off, we will stop using their service and giving them our transaction fees...
