Apple Pay: How does it work?

What is Apple Pay?

Apple Pay is Apple's foray into the contact-less transaction environment. It uses a special hardware chip most often referred to as an NFC chip, or Near Field Communication chip to effect the transaction.  The main draw of Apple Pay, is that you do not need to give your Bank details, credit card numbers, or any personal info to anyone to make a payment.

Stores that support Apple pay must have an NFC terminal at their checkouts to receive Apple Pay payments.

Setting Up Apple Pay

When you set Apple Pay up, Apple sends, in an encrypted transaction, your Credit Card information to your Bank or Card Issuer and a unique device code it generates from your Device and credit card info for your Bank or Credit card issuer to use.  The Bank or Issuer network then creates a device account number and other payment data, encrypts it so only they can de-crypt it later,  and sends it back to Apple and then your device. Apple cannot decrypt this package, it merely stores it on your device, but nowhere else.

Apple Pay does not store your Credit Card information on your device either, only a portion of your Number is kept so you can identify your card on screen.

You do not need to give your Credit Card information to anyone after this step.   Once your credit card has been set up in Apple Pay and all required information entered into it, it is no longer necessary to give out credit card details or make bank transactions to make purchases through Apple Pay.

Paying with Apple Pay

When you initiate a payment with Apple pay in a store or within an App, Apple Pay will transfer the encrypted package it stored, which does not contain your credit card information, and is encrypted by your Bank or Issuer network, in a transaction with the terminals in stores to confirm payment.   Your Credit Card info is never given out; and best of all cannot be read by any NFC terminal or reader because its not there.

You can also use Apple Pay to pay within Mobile Apps that support it.  These Apps are only running on your device, and again will only send this encrypted package to the merchant and then to your Bank or Issuer network, they do not transfer your credit card or banking details.

After the package has been sent to the terminal or App, the process moves forward like a normal credit card operation would. The bank or issuer is contacted and a request for payment authorization is made. The issuer or Bank de-crypts the data it receives, matches data with their records to find the card being used and okays or denies the purchase.

Your Card details remain with you and your Bank or Credit card issuer.

Payment transactions at stores and within Apps must be authorized by you when requested using your Touch ID, or passcode before the payment package is sent for confirmation. So unless you o.k the operation with your thumb print or passcode nothing is sent from your device.

Availability of Apple Pay

Apple Pay is currently available in the U.S, U.K, and Australia .
UPDATE: It is also available in Canada, but only with direct American Express Cards. Bank issued Amex based cards are not supported yet.
This will be updated when other countries make this process available.

Another thing to keep in mind, is that there is no Website or Transaction Portal for Apple Pay.  All operations happen on your device. That is you cannot go to a Website to use Apple Pay. You need to own a supported device (iPhone 6, 6 Plus, 6s, 6s Plus or iPhones 5, 5s, 5c with an Apple Watch) .

Nobody can request you enter Credit Card details in a website to confirm a payment, and no one can sell you anything through Apple Pay if its not done through your Apple Device.

Stores may request you verify your purchase by signature or other means at time of Purchase.

More information on Apple Pay

You can view stores, and Apps that support Apple Pay, as well as compatible devices on Apple's own Apple Pay page:
https://www.apple.com/apple-pay/

More specifics about Apple Pay security and Privacy of data and personal informaton.
Apple Pay security and privacy overview - Apple Support