A customer called in to state that he had purchased a download thru paypal, but did not receive it. Per the customer, paypal refused to assist as a download was involved. Per the customer, the merchant insisted he received the download. He asked the bank to do something. He was advised to come in to complete a dispute form, but never came in. He could not be contacted by phone, so a form was mailed to him. Still no response. He authorized the charge, so I don't think Reg E applies. What is the bank's responsibility at this point?

As you have already surmised, transaction was authorized and correct amount was charged. No Reg E coverage. To file a claim hrough VISA/MasterCard for non-receipt of merchandise, they may require a written cardholder statement including the attempted merchant contact and results of that attempt. If the cardholder does not satisfy VISA/MasterCard requirements for you to file a claim, and no Reg E coverage, there is nothing more for you to do.