To dismiss the banner you'd have to click a dismiss button which would ask you to confirm that you want to get rid of the location data completely. Then there would be a tiny little button that says “hide this location inside the photo, where I can't see it easily, but everyone totally could”. (But less stupid.)
It would be terrible because there would be huge support threads on why it's trying to share an image with an overlay, but it would get it across. Would be a different failure mode for user privacy than what you would have with a text prompt or an interstitial or whatever.
Now an app maybe just wants to set the image as wallpaper, send it to a printer or set as an avatar, so it requests to read it from storage. The OS injecting a watermark here or adding some UI would break decades of apps...