Mobile payments refer to a method of using a cell phone or similar wireless device to make payments to a merchant or similar recipient. The payment device does not make contact with the merchant's point-of-sale (POS) terminal. These payments are described as “contactless” payments as opposed to “contact” payments where contact is made by the processing terminal with the consumer's payment instrument e.g., a credit card or smart card.
Contactless payments require that the merchant have a Special Point-of-sale (SPOS) terminal specifically fabricated to process payments wirelessly (i.e. without contact). Such SPOS terminals can wirelessly receive data that identifies the payment instrument, for example a credit card or debit card. This contactless transmission is achieved using a variety of techniques including                a. Reading payment information from a near field communications chip (NFC) embedded in a credit card, debit card, cell phone, tablet, or similar device which transmits data using very short-range radio communication. The maximum range is 10 inches.        b. Reading payment information from the consumer's payment instrument using Radio Frequency Identification (RFID). The maximum range is 3 m.        c. Reading in payment information as bar codes from any object to which these bar codes are affixed using infra red data association transmission protocols. Transmission is by line of sight and the maximum range is 5 m.        d. Using short range wireless protocols such as Bluetooth to transmit payment instrument data to the POS terminal. The maximum range is 30 m.        
The short maximum transmission distances associated with the aforementioned methods of transmitting and payment data means that contactless payments are generally usable only for in-store purchasing.
The devices used for contactless payments need to be able to store data identifying the payment instrument, and then transmit this data to the Special Point of Sale terminal for each payment. With mobile wireless devices such as cell phones, this often requires that a Near-Field-Communication chip (NFC) be part of the cell phone hardware.
Contactless devices, including NFC-enabled mobile devices, which interact with SPOS terminals to effect payment, simply represent alternative data input systems that feed into the traditional payment processing networks. Once credit card and payment data is received by the SPOS terminal, processing is exactly as if a physical credit card is swiped through a non-wireless point of sale terminal. For example, a cell phone with an NFC chip, stores a credit card number and account data, and during payment transmits this to an SPOS terminal. The SPOS terminal in turn routes the credit card number, account information and transaction data through an Acquirer to the credit card issuer. The issuer retrieves the account associated with the credit card number, matches this with data received, approves or declines the payment transaction based on credit balance, and sends its response back to the merchant through the Acquirer.
Where payment is by “contact”, a credit card is swiped and the credit card number and account information is read from the magnetic stripe of the credit card. This data is routed along with the transaction data to the issuer for processing. The difference with contactless payments is only with the input devices—cell phone with NFC chip and SPOS terminal—used to receive credit card information and transaction data. With contactless payments both the data transmitting payment device and the point of sale terminal receiving the data have to be enabled for wireless transmission. Those not so enabled have to be modified or replaced.
Although some types of mobile payments can be performed over much longer distances, they too require Special POS terminals for the merchant and the payment device has to be able to transmit payment information over longer distances.