The merchant could offer a discount for using it.

I agree this could be a difficult battle and we effectively need some alternative to existing card issuers if they are to be displaced.

Current contactless payments are easy, secure and allow disputes etc.

"Hey buddy, I give you a tiny tiny discount if you pay without fraud protection..."

I mean, some places do that. But for the consumer there is no advantage. It's probably fine at cafés, restaurants and such. But why would you as a consumer want it for any more important purchase? As you mention.