I've been using Paypal as my merchant account on a business for over a year now. Overall, I'm very happy with paypal's service.
Overall, it's been reliable. The basic service has been up 100% of the time so this is the main thing. My experience with other merchant services is that they have one to five service interruptions during the year which has always been a major problem.
Secondly, fees. They really do charge just an even 2.5%. This is much better than I'm getting anywhere else. It's just much better. I have another business that runs in the millions of dollars of revenue each year where they charge an overall 3.8%. The 1.3% difference on a million dollars is $13K per year, pure profit.
Thirdly, their reports and features, are not a source of strength. Here, frankly, Paypal is not superior, not yet. I run a small company so I like to have lots of limits on what people can do, different reports that can be pulled, and enough safeguards in the system so I'm not worried about people stealing. Paypal has some of what I want but not enough. For instance, to their credit, they added last year different logins with different permissions. But, there's no way to get an email notification sent to me if anyone spends money from the account without having an email sent to me everytime someone puts money in the account. Another problem is that there's no reporting by different emails that people send the money to so there's no way to track by product line without lots of sorting. And since you can only have one Paypal account per tax ID, this really limits the use of Paypal for companies with mulitple product lines or divisons.
Overall, if I set up a new business, I'd do it with Paypal.