Earlier quoted context omitted.
Wallet at least has a semi-plausible non-evil answer: Users who kick their VPN on to another country and try to use apple pay at checkout will unexpectedly get declined (because the purchase would appear to be coming from another country perhaps?). Apple could fix that with proper UI though.
I don't see any reason why Apple Pay would use IP geolocation like that when it's running on a device that has GPS.
I don't think contactless Apple Pay actually uses device geo[1] for authorization, but it's still worth noting that iOS devices without cell connectivity (ie WiFi-only iPads) don't have GPS anyway.
You can use Apple Pay on websites in Safari, though, which IIRC doesn't require location permissions to work.
1. You have to be able to use it in the same places you'd use a normal card, which means you can't rely on network connectivity of any kind.