If Apple Pay is holding you from reinitialising your Watch, don’t be afraid. You can easily try to see if it’ll solve your problem like before. All cards previously added to your watch can be added again at the tap of a button. Even if you set up your Watch as a new Watch, the setup process will guide you right through it. As I’ve stated here a while ago, I had previously restored my Watch (as well as my phone) multiple times to get it to work. At none of those instances did I lose my ability to use Apple Pay afterwards. I have three cards that I use with Apple Pay, and all of them work flawlessly after no less than 6 full restores of my Watch (some, but not all of them took place well before the release of WatchOS7.1). So Apple Pay doesn’t have to hold you back — It doesn’t, and you shouldn’t let it.
Before you begin to try doing it with a restore (which could very well just be what it needs in your case), please verify that:
- Auto Unlock (‘Use your Watch to unlock apps and your Mac’) is disabled in > System Preferences > Security and Privacy > General;
- Auto Login is disabled on your Mac (same spot);
- In Keychain Access, all entries containing AutoUnlock and Auto Unlock have been deleted;
- The contents of the folder ~/Library/Sharing/AutoUnlock/ have been deleted (not applicable in your case, since the folder doesn’t exist).
Use the steps outlined by @stoska992 to do this.
After verifying this, unpair your Watch on your iPhone and afterwards, immediately create a backup of your iPhone itself, either to iCloud or your Mac. If you use your Mac, please encrypt the backup.. Do not do ANYTHING else on your iPhone before finishing backing it up.
After completing the backup of your phone, you could even restore your phone to it, for good measure. To do this, head to Settings > General > Reset and select Erase all content and settings. Caution: ONLY do this after you’ve created a backup!
Next, when your iPhone finishes erasing itself, follow the steps presented and then opt to restore it from the backup you’ve just created. If you created your backup using your Mac, you obviously also need to use it to restore the backup.
If you used your phone and iCloud to carry out the restore, you will at some point also be presented with the option to restore cards previously added to Apple Pay. Select all of your cards and provide answers to additional questions asked to restore them. For credit cards (Visa, MasterCard, American) restoring them literally only involves you providing the 3 digit CCV code located on the back. For bank cards/debit cards (Maestro, VisaPay; provided by your bank) you will usually receive an SMS with a code that needs to be entered. Upon reception of such messages, the code will even be automatically populated for you most of the time. After the restore process has been completed, all cards will be usable again as before. You may have to change your default card if you have more than one.
After your iPhone’s restore is complete, let it sit there for a while and have it finish installing apps and what not. This may take up to an hour depending on your internet connection. As soon as you can use your iPhone, you can proceed to also restore your Watch. To do so, open the Watch app on your iPhone, pair your Watch, select Set up for myself, select Restore from backup, if multiple backups exist, select the one you’ve just created and complete the restore process by answering questions that you may be presented with as desired. At some point, you will also be asked about Apple Pay and what cards to restore. Select all your cards and walk through the restore process, which is similar to what I described above. Do not, at any point, skip or postpone any step in the process of restoring either your phone or your watch, as doing so may result in data loss, which is what we’re trying to prevent in the first place.
After both your Watch and your phone have been restored, I’d advise you to wait several days before trying to enable AutoUnlock again. When you do, the process should be as simple as going to > System Preferences > Security and Privacy and enabling ‘Use your Apple Watch to unlock apps and your Mac’.