How will Apple Watch be used for Apple Pay?

The watch knows when it's on your wrist. To enable Apple Pay and other functions you have to unlock the watch after you put it on. This can be done from the phone or by typing a code on the watch. Thereafter, until such time as you take the watch off again, you can pay for things by just holding the watch near the payment terminal and pressing the button on the side.

Apple executive explains how Apple Pay will work with Apple Watch
Once your watch is associated with your iPhone (including iPhone 5) you just pass your watch near the NFC terminal reader and double click the side button:

As long as users have their iPhone nearby and their watch is unlocked, then they simply need to double tap the watch's side button - no need for Touch ID or even a passcode.

Apple exec Eddy Cue explains Apple Pay on the Apple Watch
With its near field communication services. Your stored Credit Card information is transmitted via secure RF transaction, secured by Apple's "Touch ID"system.
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