Do people think USD being accepted at kink stores gives the USA a reputation risk? I just don't see the argument that a payment processor being able to process payments legitimately gives them reputation risk. I don't doubt that people write in to MasterCard to claim it does but people write about everything.
If there were a law that MC had to be an impartial utility, like a phone or electricity provider, then it wouldn't hurt their reputation. But since there is no such law, they have the choice to deny transactions, which also means they can be blamed (by puritans) for allowing them.
IIUC, the problem here is the colluding behavior. Steam can't just "drop" MC and use Visa for the transactions as the banks must abide by MC's rules even when MC isn't the payment processor just to be eligible to be a bank for MC.