You can play PS3 games that output at 720p on a 1080i display, but the experience comes with compromises.
Upscaling Artifacts: The PS3 (or your TV) must upscale the 720p signal to 1080i. This often introduces blur, scaling artifacts, or a loss of sharpness depending on the scaler quality.
Interlacing Issues: 1080i displays fields alternately (odd/even lines). Fast motion can cause "combing" artifacts or a slight shimmer, which is absent in progressive 720p or 1080p.
Unused Resolution: You are not utilizing the display's full progressive capability, effectively wasting vertical resolution.
Compatibility: It is the standard way to connect a PS3 to an older 1080i HDTV. Almost all games will function without configuration issues.
Conclusion: While functional, 720p on 1080i is suboptimal. A display upgrade or newer hardware yields significantly better image quality.