Yes, definitely online applications are processed much faster. You can take a look at the following spread sheet for student visa applications from pakistan for Sep 2013. A lot of it has been discussed in a relevant thread on this forum too.
http://goo.gl/55cjf
At least getting to the medical stage is remarkably faster i.e. for online applicants with no ambiguities, it at times took just 2-3 days to get medical call, where as for paper based applicants it was much longer.
Basically CIC islamabad after doing basic completion check on your application, scans all docs and uploads into their system. Doing this manually takes time, where as there is no such thing when you apply online.
Also, if there is a mistake in your application i.e. a doc missing or an additional requirement, you would know right at the point of application. Otherwise in case of paper submission, it is possible (happened with many people including myself) that an additional form was required, hence your application was incomplete, and was lying dormant for months in the embassy. It was only returned unprocessed when you asked about its status and had to start all over again.
This does not happen in online option.
Lastly, when applying on paper it is a mandatory requirement to submit a good number of originals including passport. In case of online application, you only submit scanned copies, and even passport is only requested latter, when it is almost confirmed that you will get visa.