It's a combination of things. Here's I'll try to walk you through it with one of my own versions. I'll start with this banner I made using my son:
CLICKStep One
Make sure all the layers are merged. to do this, select all the layers and hit 'Ctrl + e'
CLICKStep Two
Next, double click the layer and select the 'stroke' option. change the colour to black, and make it 'inside' rather than 'outside. You can change the thickness of it, as well, if you like:
CLICKStep Three
Select the eraser tool, then find a brush that gives you the kind of effect you want. You'll have to play around with this for a bit until you get the one you're looking for. Delete the edges to your liking. Don't forget that 'trl + z' is your
friend ;)
When choosing your brush, be careful that it's solid or you'll get something like my finished product with the grey areas here and there.
CLICKNow, keep in mind that IE doesn't show the transparencies for .png files. FF does. unless the site has the .png correction code for IE, you won't be able to see it.