I got some thin (about 2-3mm)foam from a car boot sale. Ideal for the sides, needed something a bit more robust in the bottom. Similar stuff is sold for putting under laminate flooring - try your local DIY warehouse. Good solution - only marginally dearer than bubblewrap!
Any form of painting is likely to crack when the pannier gets bashed about, in my opinion.
A friend had a set powder coated inside - didn't work out at all well.
Good luck,
Neil
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