what does "Pay with Passcode" mean?

It sounds like you might have set up a payment (credit card, debit card) in Apple Wallet. If for some reason you aren't using the touch ID, or haven't set it up, you can use the passcode for your phone to pay for your purchases when you use the contactless terminals at stores. FYI, the Apple Wallet is a great security feature. It does not send the store your credit / debit card number, but a string of codes to verify your card.

Do you have Face ID turned off? or just Apple Pay for Face ID?