You get medals and requisition points from playing that you can use to unlock new stratagems, which includes everything from weapons to orbital bombardment. Medals get you new weapons, cosmetics, etc. You also find samples you can collect on missions, and these unlock permanent upgrades for stratagems. There are player levels, but these just unlock new titles once you get past the basics.
The battle pass equivalent is Warbonds, which include new weapons, armor, cosmetics, etc. Unlike most games, warbonds don't expire and you can find enough premium currency while playing to get them without too much trouble.
On the whole, new warbond weapons tend to be different rather than obvious upgrades. The default assault rifle you get stays perfectly viable throughout the game.
I felt the exact same way about the conversation you mentioned. I really liked the idea of the quest, but way they handled it just utterly drained all the stakes. And as you noted, it's weird to see a misstep like this after they nailed it once in Sumeru.