What Is a Payment Reference Number and Why Do You Need It?
Payment reference numbers are a critical tool for businesses that want efficient handling of incoming payments. But what exactly is a payment reference, and why should you use one?
What Is a Payment Reference Number?
A payment reference number is a unique code included on an invoice that allows the recipient's bank to automatically match the payment to the correct invoice. It acts as a bridge between the payment and the transaction it relates to.
Different countries use different systems:
- OCR (Sweden) - Optisk Lasning av Check, used with bankgiro/plusgiro
- KID (Norway) - Kundeidentifikasjon, used in the Norwegian banking system
- FIK (Denmark) - Faelles Indbetalingskort, used for +71 payments
- SEPA Structured Reference - Used for cross-border European payments (ISO 11649)
How Do Payment Reference Numbers Work?
A payment reference number typically contains:
- Customer or invoice number - To identify the payer and the specific invoice
- Check digit - A calculated digit to detect input errors
The check digit is usually calculated using the MOD10 algorithm (also known as the Luhn algorithm). This makes it possible to detect whether someone has entered incorrect digits.
The MOD10/Luhn Algorithm
The MOD10 check works as follows:
- The digits in the reference number (excluding the check digit) are weighted alternately by 2 and 1 from right to left
- Any result exceeding 9 is split into its individual digits and summed
- All results are totalled
- The check digit is the number needed to make the sum evenly divisible by 10
This provides highly effective error detection with minimal computational overhead.
The ISO 11649 Standard
For international payments, particularly within the SEPA (Single Euro Payments Area), the ISO 11649 structured creditor reference is used:
- Begins with "RF" followed by two check digits
- Can contain up to 25 characters
- Provides a standardised format for cross-border payments
- Uses MOD97 for check digit calculation
Benefits of Payment Reference Numbers
1. Automatic Reconciliation
When customers include the payment reference, the bank can automatically match the incoming payment to the correct invoice. This eliminates manual work figuring out who paid for what.
2. Fewer Errors
The check digit in the reference number makes it nearly impossible to enter incorrect details without the system detecting the error. This significantly reduces mismatched payments.
3. Faster Settlement
With automatic reconciliation, you can quickly see which invoices have been paid and which are still outstanding. This improves your cash flow overview.
4. Professional Impression
Having a payment reference on your invoices gives a more professional impression and shows that your business has good financial processes.
Payment Reference Systems by Country
Sweden - OCR
- Used with Bankgiro and Plusgiro
- 2-25 digits with MOD10 check digit
- Administered by Bankgirocentralen
Norway - KID
- Used with Norwegian bank accounts
- 2-25 digits with MOD10 or MOD11 check digit
- Administered through the banking system
Denmark - FIK
- Used with +71 payment type
- Requires FI-kreditornummer from the bank
- Betalingsservice for automatic recurring payments
Europe - SEPA
- Structured creditor reference per ISO 11649
- RF + check digits + reference
- Used for cross-border euro payments
Tips for Using Payment References
- Ensure the payment reference is clearly visible on the invoice
- Inform customers about the importance of using the reference when paying
- Check that your bank account is set up to receive referenced payments
- Use the invoice number as the basis for the reference for easy matching
- Test your reference numbers to ensure check digits are calculated correctly
How to Generate Payment References
There are two common methods for calculating check digits:
- Modulus 10 (Luhn) - Uses weights 2 and 1 alternating. Most common method.
- Modulus 11 - Uses weights 2, 3, 4, 5, 6, 7 in sequence. Used in Norway alongside MOD10.
Fakturagenerator.com automatically generates valid payment references for all invoices you create. You do not need to worry about the calculations - we handle the technical details.
A good payment reference system can save you hours of manual reconciliation every month.
With Fakturagenerator.com, you get automatically generated payment references on all invoices, so you can focus on what truly matters - running your business.