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In the end I was able to successfully build an app with the com.apple.developer.payment-pass-provisioning entitlement using automatic signing.
So this is one of those situations where it may be that you need to keep Manual Signing because this entitlement is a special entitlement that is granted on a per-developer basis. And the reason Xcode has an issue with Automatic Signing is because it is not able to verify that your Xcode managed profile can add this entitlement, like a traditional capability. However, to double check my logic, it would be good to review the XC managed profile, or the profile Xcode is referencing in Automatic Signing, on disk to see if there is a sync error between the profile on disk and the one in the Developer Portal. If the managed profile in the Developer Portal matches the one on disk, you just may have to keep Manual Signing enabled for this entitlement.
@meaton Is this still the case in Xcode 14? The docs mention that automatic signing is now possible with Apple Pay entitlements for merchants.
Does that apply to banks too?