> I personally use my smart watch for NFC payments

But not Google Wallet, and with GrapheneOS as the connected device?

NFC payments via Google Wallet running on my Pixel Watch 3 connected to a phone running GrapheneOS works just fine. I use this regularly. (It doesn't require Google Wallet to be installed on the phone.)

At least one of my cards required Google Play Services to have the location permission when initially adding the card though.

Yes, I have a Garmin watch paired with GrapheneOS.