Two-Factor Authentication is a means of security check which requires the user to give two sets of credentials from different categories for the purpose of identification; one is typically a physical token and the other a security code.
One type of factor authentication is receiving a One Time Password (OTP) which is typically carried on your key ring and displays a pseudo-random number that changes periodically, a 'seed record' used to calculate the pseudo-random number.
An Extra Layer of Security
Software Tokens
This is exactly the same technology as the hardware version. However, instead of having a separate device, the smartphone can be used to calculate OTP from the 'seed record'.
SMS Based
Instead of carrying around an extra piece of hardware to calculate the OTP, PIN has been sent to registered mobiles, it provides all power of token less two-factor authentication with zero footprint.