The newest OTA update for Nexus and Pixel owners on the Developer Preview builds of Android O seems to be bringing back Android Pay functionality, but only for some users. There has been little in the way of hard evidence as to whether or not Android Pay will work after the update for a given user, but multiple staff members over at 9to5Google installed the update, and they gave scattered reports of whether it worked, along with a few ideas of why that may be. The new update brings devices up to version number OPP2.170420.019, and seems to be rolling out over the air to all Dev Preview users.
Of the 9to5Google staff that installed the update, two ended up reporting Android Pay as not working. One had never set up Android Pay fully and added a credit or debit card before. The other staff member didn't indicate any issues that may be related to Android Pay. Users reporting it not working seem to be running into issues with adding in a debit or credit card, but not with adding in and using gift and loyalty cards. The problem seems to be with Android's built in Compatibility Test Suite, which is used in the SafetyNet protections that keep rooted or modified devices from using apps like Android Pay and Pokemon GO.
A similar issue occurred last year when Nougat was rolling out in its Developer Preview form. Around the same time as this update, a third iteration of the preview came out, and fixed the issue for a number of users. A CTS Profile Mismatch occurred in some devices on that third preview, for reasons mostly unknown, and the same seems to be happening here, for the most part. Some Nexus users, however, are having issue with taking the update; their devices are still showing Android 7.1.2 in some system files instead of Android O, which makes the update OTA reject them. CTS Profile Mismatch errors occur for a very wide variety of reasons, including USB debugging being active, and in the case of root users taking advantage of Magisk's ability to hide from root detection systems, SELinux being set to Permissive instead of Enforcing. The exact cause in these recent cases has not been pinned down.