I don't see how he got burnt. He decided he wanted to accept credit cards directly, instead of having customers use their PayPal accounts to pay him, and so started using a PayPal service he had not been using before.

That means he's going to be subject to the same kind of things other merchants who accept credit cards have to put up with (everywhere, not just at PayPal), including acquiring banks deciding to hold a reserve to offset their risk.

The acquiring bank is on the hook to the credit card associations and issuing banks for any chargebacks that he can not cover. Worst case would be if he goes out of business leaving no money, and a year's worth of his customers chargeback. The acquiring bank is on the hook for all of that.

From a risk point of view, an acquiring bank is in about the same position as a bank that is giving you a loan, collateralized by your business, in the amount of a year's worth of your credit card sales.