Payment ID is an arbitrary and optional transaction attachment that consists of 32 bytes (64 hexadecimal characters) or 8 bytes (in the case of integrated addresses).
The Payment ID is usually used to identify transactions to merchants and exchanges: Given the intrinsic privacy features built into Monero, where a single public address is usually used for incoming transactions, the Payment ID is especially useful to tie incoming payments with user accounts.
Since the 0.9 Hydrogen Helix version, the Payment IDs can be encrypted and embedded in a payment address. The payment ID's of this type should be 64-bits and are encrypted with a random one-time key known only to the sender and receiver.
It is recommended to use the official wallet's
integrated_address command to automatically generate Integrated Addresses that contain Compact Payment ID's. If you want to use the command line, you can generate Payment ID's as follows:
Creating a compact Payment ID for an Integrated Address:
# openssl rand -hex 8
Creating an old-style Payment ID:
# openssl rand -hex 32