Traditionally buyers paid via PayPal directly to the seller's account without Etsy seeing the money. This is still a supported option for grandfathered sellers and for sellers in countries where Etsy Payments does not operate, it is called "standalone PayPal".
A couple of months ago, for those sellers that use Etsy Payments, Etsy actually switched to deducting the fees from the sales like you suggest. But that still doesn't cover the cases where buyers want a refund afterwards, or if the seller had no sales to cover the listing fees.
A couple of months ago, for those sellers that use Etsy Payments, Etsy actually switched to deducting the fees from the sales like you suggest. But that still doesn't cover the cases where buyers want a refund afterwards, or if the seller had no sales to cover the listing fees.