For example I have a WD Passport external hard drive. After installing WD security I can enable and disable password protection, however the settings basically get applied instantaneously. Does this mean encryption is not actually happening? If not, is there any point in using a password?
It is possible to achieve an "instant password change" with an encrypted disk. The idea is that the disk is really encrypted with an internal secret key K. K is a fat, random key that you never see; it was generated when the disk was first powered, and it never changes. K is then stored in a specific slot, encrypted with a second key K', which is derived from your password. When you unlock the drive with your password, the disk firmware recomputes K' from your password, then decrypts K, and then uses K to read and write data to the disk.
When you change your password, K is reencrypted with the new K', but that's fast because K is, say, 128 bits, not 128 gigabytes.
A disk which does encryption that way also often offers a fast "wipeout" feature, by the simple expedient of generating a new K: the previous K being lost, every contents which were encrypted with K (the whole disk) are as good as cleared. (Thus, "K never changes" is not completely true; rather, K does not change when you change your password.)
Now this does not mean that your specific disk uses encryption, only that it could still use encryption, even if it offers fast password changes. There indeed are disks with "password protection" which is only a simple firmware-based lock, without actual encryption of the data, and that can be bypassed by changing the electronic board. If unsure, try to obtain the disk specs from the manufacturer: if actual encryption occurs, then the manufacturer will state it proeminently on the disk datasheet.
Presumably it doesn't decrypt the drive just changes the password to one the drive knows internally (probably blank).
I.e. the actual data on the disk platters is encrypted regardless of whether a password is set, but the key which it is encrypted with is not.
I have no specific knowledge of how WD Passport encryption - I am just noting that the instant encryption/decryption is not necessarily suspicious.
Your data is not encrypted regardless of setting a password or otherwise