> merchants can’t select what level of security they want from the credit card processor

That really depends on the processor; many processors do allow merchants specify your acceptance rules in quite deep detail.

There's a bit of a dichotomy in the processor market: on one side you have those that aim to make it simple for their customers and unburden them, while on the other side you have those that expose all the complexities and give intricate controls. The first side won't allow you to specify security requirements, while the second side will give you a hundred options (of course there's also processors positioning them in between). The two sides generally target different customers.