Some people have money in their PayPal stored-balance component, and it's easier to spend it out than to have them credit it back to a bank account.
I suspect some people use it as an "off the books" account in family/spousal relationships. They'd have a fit if the credit card had a $300 charge, but they don't even know you had $300 in PayPal balance from selling stuff on eBay and can go to town.
That's a good question, and here's what my customers have said. My company's market is digital products at around $10-100. Not saying everything here is justified, but the fact that a customer thinks these things should be justification for you to cater to them. (Customer-is-always-right principle.)
- Credit cards are hard to obtain in my country, but PayPal is easy enough.
- The last time I had a credit card, I spent it all at once! So all I have is PayPal now.
- I have USD in my PayPal account, but I don't think my credit card works with USD.
- PayPal is safer because it offers some protections against fraud.
- I don't trust to give a company my credit card number, but I trust that logging into PayPal at a paypal.com URL is fine.
- I have extra money in my PayPal account that I can spend, but I shouldn't spend from my checking account.
- PayPal is easy to sign up for. I don't have to walk into a bank or make phone calls.