@, giving the seller the benefit of the doubt as it may have been genuinely listed in error, the main priority is to make sure you are refunded in full.
As you paid by PayPal, the seller really should be refunding you via PayPal. The refund will go back to the source by which you paid via PayPal. (For instance, if your payment was funded from your bank account, the refund will go back to your bank account. If your payment was funded from your credit card or debit card, the funds will be refunded back to that card. It may take a few days to appear after the refund has been actioned.)
Then the seller will need to cancel the transaction if they don't want to pay the final value fee. Strictly speaking, the seller should be selecting Out of Stock as the reason for cancelling. Some sellers would rather wear the final value fee than cancel for that reason, though.
Your seller shouldn't be giving a refund directly to your bank account, as that is not how you paid. The seller would be leaving themselves open to an eBay or PayPal claim by you, since they would not be able to demonstrate that they issued a refund. I'd suggest that you tell the seller something along these lines:
"Dear [name],
I understand that item number [xxxx] which I won isn't going to be supplied, as you say it was listed in error. As I paid via PayPal, please refund me through PayPal; I will not need to give you my bank account details for the refund to be issued in this way.
Regards,
[name]"
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