A Retiree’s Guide to Digital Finance: Terms, Tools and Tips

Like it or not, digital technology permeates nearly every financial activity we perform today. The economic landscape—which includes financial services and banking—is shifting to the digital space at an accelerated pace, and things will only move faster in the coming years.

Deloitte predicts that by 2025, finance will be highly automated and will double down on fields like financial information and business insights. Future transactions will increasingly become touchless as technologies like blockchain merge into operations. Cycles will also move in real-time. Periodic reporting will no longer drive predictions and decisions due to the increased pace. Moreover, all-new service delivery models and robots will emerge, integrating into a highly diverse financial workforce composed of gig workers, freelancers, crowds, or “swarms.” Digital transformation is a buzzword on every CFO’s lips.

So where does this put retirees and the financial services they need for a secure retirement? Today, retirees should join the wave and learn about digital finance instead of sticking to traditional—and sometimes antiquated—processes and concepts. Migrating financial planning and management to the digital world means greater convenience, comfort, flexibility, mobility, and opportunities.

Many digital finance platforms today are highly user-friendly; some are even tailored to older adults and those in retirement. This development is crucial as populations age. Regulators are also helping new financial platforms thrive by creating opportunities for creativity and innovation—accommodating sandboxes in which invention can be freely expressed and integrated into the financial system. Easing the regulatory climate on digital finance can help promote financial inclusion and better services across jurisdictions, which can only benefit the financial well-being of older adults planning for retirement or already in their retirement years.

What is Digital Finance?

Digital finance is the digital delivery of traditional financial services, accomplished through software and hardware. The ubiquity of tablets, laptops, and mobile phones makes such services mobile seven days a week, giving financial accessibility to unbanked, under-banked, and financially underserved populations. Moreover, it compensates for regions that need more physical infrastructure to deliver essential financial services.

Digital finance affects individuals, companies, and businesses. Digital finance and fintech are revolutionizing accounting and supplanting traditional finance functions at the corporate and enterprise levels.

Other technological movements and advancements are accelerating the digital metamorphosis. Blockchain, artificial intelligence (AI), big data analytics, and machine learning are all examples of enhancing technologies. Such technologies improve the accuracy and speed of financial reporting, budgeting, analysis, and other functions.

For retirees, digital finance means greater convenience and efficiency in retirement planning, banking, credit card and loan payments, day-to-day budgeting, and investing.

Key Digital Financial Services You Should Know

Digital finance is segmented into various specialized services. Understanding these services helps retirees manage their personal finances efficiently. The increasing number of digital financial services provides retirees with more savings, budgeting, payments, management, and investment options.

Mobile Payments

The COVID-19 pandemic accelerated reliance on digital or mobile payments. The world quickly shifted to digital out of necessity as populations were forced to isolate or quarantine themselves. This phenomenon led to a permanent change in financial behavior.

Mobile payment apps allow quick and effortless transactions from a mobile phone. They also make payments more secure than traditional methods by adding new features such as biometric recognition, two-factor authentication, and other verification methods.

The mobile payments market size was valued at $13.9 billion in 2022. The industry is projected to grow from $14.99 billion in 2023 to $23.65 billion by 2030. The growth is expected from continually increasing acceptance of payments that leverage new technologies. In the future, sound wave-based payments will not need internet connectivity, making them a resilient payment method useful in remote areas without connectivity or smartphone access.

Mobile-based payments allow seamless cross-border and other global payment services that will be convenient for retirees who travel frequently or relocate abroad. The volume of cross-border or international payments is estimated to reach about $156 billion annually by 2022. Such payments encompass many transactions, including remittances sent by migrant workers and multibillion-dollar corporate acquisitions or settlements. However, the fastest-growing segment for mobile payments is individual consumer transactions for various goods and services.

Mobile commerce is also expected to aggressively drive growth in this sector, with consumers using mobile devices such as tablets and smartphones to buy items online. The demand from this segment is projected to grow by 70 percent in five years. Hence, merchants are re-tooling their platforms to accept mobile payments domestically and internationally.

With so much infrastructure being prepared for the next generation of transactions, retirees must stay abreast of the technology. Familiarity with mobile payments and the digital wallets that enable them will help older adults or seniors settle payments instantly without having to do in-person visits or sign physical checks. Digital payments save time and money.

Mobile payment apps can be helpful for bill payments, e-commerce, small businesses, medical payments, insurance premiums, healthcare services, and other vital financial functions for retirees.

Online Banking

Online banking has transformed the personal finance landscape. It has eliminated frequent visits to the bank and enabled numerous transactions at the click of a button. Moreover, it has allowed diverse products and services to flourish, some of which may favor retirees.

For those of retirement age, online banking reduces in-person banking, which frees up time for leisure and other personal activities. The easy deposits and withdrawals, innovative financial products such as retiree bank accounts with favorable interest rates, credit card services, and automated retirement account contributions offer a suite of conveniences to the retiree who wishes to manage personal finances from the comfort of home.

A digital checking account, for example, works like a regular one but without access to a physical bank. The benefits, however, might be attractive to retirees who want to maximize their savings. Most digital checking accounts have lower charges or fees due to lower operating costs. Interest rates for such accounts may be higher due to lower operating costs than traditional banks. In addition, these accounts provide round-the-clock access through the web or mobile, which may be an essential feature for retirees who spend time abroad.

Online banking and fintech apps often eliminate the need for a physical debit card or credit card by providing digital versions of such cards. Everything can be transacted through an app—another convenience digital accounts offer.

For retirees or would-be retirees who wish to start a new business, online business banking might provide a convenient avenue to accept payments and grow their businesses. Such accounts are perfect for separating personal finances from business accounts. They are also relatively easy to set up for those just starting or shifting to a new career as entrepreneurs.

To make the most of an online bank, seniors or retirees should look for the best features that suit their financial goals. For example, one might benefit from a savings account with a high APY or annual percentage yield or a checking account with better interest rates. Other features retirees on a fixed income and budget should look for include no minimum account balance, no monthly maintenance fees, and branch services with safety deposit boxes—in case seniors prefer the occasional in-person service and storage for their valuables. In any case, applicants must be careful to read the fine print.

Some banking apps have expanded services such as life insurance and health care access—all benefits you can add to a growing list of conveniences in a single account.

Online Retirement Accounts

An individual retirement account (IRA) is an investment account with tax advantages. IRAs are designed to help everyone save consistently for retirement. The IRS has set the maximum annual contribution limit for such accounts. The money you invest in an IRA can grow tax-free or tax-deferred, depending on the type of IRA you choose.

IRAs have long been a staple in retirement planning. However, they are not immune to change. Digital transformation is happening in the world of retirement accounts to everyone’s benefit. Such tax-advantaged retirement accounts are more accessible than ever. Crucial to long-term retirement savings, such digital IRA platforms allow easy signup, automated contributions, and regular monitoring and adjustments of investments.

To help you with financial decisions, you can use online brokers or robo-advisors to evaluate IRA offerings. Moreover, fintech apps in this sector allow you to seamlessly switch from one type of account to another or from one provider to another. There are IRA accounts for passive and active investors, so pick one that suits your investing style.

Online Investment Platforms

Today, investment information and advice sources are limitless. Robo-advisors and online brokerage platforms have supplanted their traditional counterparts and conveniently provide retirees with investment, money management, and portfolio diversification advice and opportunities, all from the convenience of a website or an app.

While traditional investment and retirement planning may involve in-person consultations with a broker, professional account manager, or financial advisor, online investment platforms provide many options without leaving home.

Robo-advisors—automated platforms using algorithms to match people with investments that suit their time horizon and risk profile—are shaking up the retirement investment landscape. Other terms for these platforms include “digital advice platforms” and “automated investment advisors .”Most robo-advisors use ETFs as their primary investment type.

There are pros and cons to using this new investment method. The advantages of using robo-advisors include the following:

Instant diversification

Using a robo-advisor gives you more comprehensive options in terms of products and investment choices. The investment approach is based on modern portfolio theory. Robo-advisors focus on complete allocation to major asset classes, which include real estate, stocks, and bonds.

Tax-loss harvesting

Robo-advisor platforms offer tax-loss harvesting for taxable accounts. What does this mean? It refers to offsetting one’s capital gains through another asset sale to create a loss on your record. This method enhances after-tax returns. However, it is not beneficial to all investors. If you are in the 10 to 12 percent tax bracket, you are taxed at the 0 percent rate for capital gains.

Access to low-cost investments

Robo-advisors or robo-investors are often a cheaper alternative to using asset management firms. This difference is because the lower operating costs give them an advantage over brick-and-mortar businesses. Typically, robo-investor fees range from 0 to 0.5 percent of AUM or total assets under management. By comparison, a “human” or typical financial advisor’s AUM fee ranges from 1 to 2 percent. Overall, such savings could add up significantly over time.

Unbiased non-human advice

Humans have biases that may derail investor plans. Robo-advisors can eliminate the potential for pushing investment firms’ agenda—like selling their own products or basing their advice on experience.

Budgeting Apps

Budgeting apps are ubiquitous these days. They help you track finances, set financial goals, and gain financial knowledge through their free references. They also make the day-to-day financial decisions easier through automation of some services. Moreover, they make personal financial management more convenient, secure, and private.

These apps can help retirees chart a roadmap for cash flow and broader financial goals, such as savings over time. Moreover, if you have a preferred budgeting technique, these apps can help you customize your plan based on your choice.

Instead of relying on conventional pen and paper or the “envelope method” of stashing cash, retirees can manage their budgets fully at the convenience of their smartphone.

Should You Transition From Traditional to Digital?

The switch from traditional financial services and methods is a personal one. However, with the wide availability of excellent digital financial services, missing out on their benefits would be disadvantageous. Among the advantages of moving from traditional financial services to fintech services in retirement are cost-effectiveness, real-time reporting and tracking, access and convenience, and security.

Some older adults and retirees understandably have concerns regarding fintech apps and how they are managed. Among such concerns are customer support reliability, online security, data privacy, and the learning curve when transitioning.

Given that the user interface or UI design for such apps undergoes continuous improvement, signup and navigation should be easy to manage. Instruction videos and other online resources can shorten the learning curve. When in doubt, asking a family member or loved one for assistance never hurts.

Digital finance can solve many problems for older adults and are thus worth the shift. Such services can help ease investment concerns through free education, improve financial well-being with innovative tools, and promote digital financial inclusion in the senior demographic, who often have less income and reduced access to financial services.

Moreover, digital finance can help combat the dreaded “four headwinds of retirement“: inflation, market volatility, longevity risk, and taxes. The innovative services in digital finance apps help automate investments, provide diversification to combat market fluctuations, extend and manage savings with better interest rates, and, in some cases, provide tax-loss harvesting, which are highly beneficial to retirees who want to make the most of their retirement income.

 

A Glossary of Essential Fintech Terms For Retirees

Older adults and retirees must improve their fintech vocabulary as they shift to digital financial apps. Familiarity with basic and novel financial tech concepts is crucial.

Digital Wallet

Also called an e-wallet, virtual wallet, or mobile wallet, a digital wallet is a type of software, app, or online service that allows users to store money and pay for things electronically without using physical cash or cards.

Digital Bank

A digital bank or neobank is a financial institution that offers banking services to its clients entirely online. The platform may be a website or mobile app. Neobanks do not have a physical location.

Encryption

Encryption is a process of converting data or information in its original form to unreadable code or ciphertext. This step aims to grant access only to authorized parties in a transaction.

KYC or Know-Your-Customer

KYC is a compliance or regulatory practice to authenticate a user’s identity. KYC is in place to help prevent financial fraud.

Machine learning

Machine learning, or ML, is the field that employs algorithms to allow computer systems to learn from the data provided to generate predictive models. Fintech is increasingly integrating machine learning into its processes.

Open banking

Open banking involves sharing financial data between third-party service providers and banks, including online transactions, through an open API (application programming interface).

P2P (Peer-to-Peer) lending

Peer-to-peer (P2P) lending is lending between parties without needing a centralized authority or trusted intermediary like a bank or credit union.

Alternative finance

Alternative finance refers to the range of financial solutions which differ from conventional financial instruments. Examples of traditional instruments include stocks, bonds, and cash. P2P lending and crowdfunding are examples of alternative finance.

Cryptocurrency

Cryptocurrency or crypto is a novel form of digital currency that takes the form of an encrypted digital ledger with immutable properties. It resides on a blockchain and is usually decentralized, which means it doesn’t rely on central entities like financial institutions to validate its transactions.

Insurance Technology

Insurance technology, or Insurtech, is a set of emerging fintech applications in the insurance field. Most such applications are focused on productivity improvement for insurance companies. Insurtech works by lowering insurance provider costs and improving costs for consumers. Another function of such a technology is to improve the consumer experience through a better digital user experience. Insurtech has many advantages, including reducing fraud claims and ensuring efficient claims management and underwriting.

RegTech

RegTech, or regulatory technology, is a crucial part of fintech. Regtech involves using information technology (IT) in financial services to improve regulatory processes. Regtech helps ensure efficient regulatory monitoring, better compliance, and financial reporting.

Smart contracts

Smart contracts are the digital equivalent of regular contracts. They are executed programmatically using blockchain technology. They facilitate digital agreements, automated transactions, and verification.

Online broker or online brokerage firm

An online broker is a financial company that facilitates the sale or purchase of a security over the Internet or an electronic network. By definition, a broker is an intermediary between an investor and a securities exchange. An online broker is simply one that performs its functions digitally—generally through a trading platform. The term “online brokerage firm” refers to the same thing as the term “online broker.”

Online brokers earn by charging a fee or a commission. The commission’s size differs significantly among brokerage firms. Some charge a flat fee per transaction. Others charge a percentage of the transaction’s value or a combination of both. Running an online brokerage firm is generally less costly than a brick-and-mortar business. Hence, many online brokers offer lower fees than conventional brokers. Such firms also provide online resources to help customers autonomously engage in their trading or investments. In the US, some refer to online brokers as discount brokers.

Robo-advisor

A robo-advisor is a digital finance platform that offers algorithm-driven automated financial planning and investment services. Robo-advisors operate with minimal or no human intervention. Robo-advisors typically conduct online surveys to learn about your financial goals and situation. The data gathered is used to customize investment advice and make automated investments for you.

Other terms used to refer to robo-advisors are “digital service platforms,” “automated investment management,” and “automated investment advisors.” To choose the best service, look for a user-friendly interface for easy account setup, well-designed account services, excellent goal planning, and portfolio management. Also, look for comprehensive education resources, low fees, and up-to-date security features that prevent your account from being hacked.

Two-factor authentication (2-FA)

You need more than typical passwords to protect your online banking and investment accounts. Two-factor authentication, or 2-FA, is a second layer of defense for your accounts. It is a security system that requires two separate or distinct identification methods to access something.

The 2-FA method strengthens the security of devices like smartphones, physical objects like doors, or an online account. Two-factor authentication secures your account by asking for two types of information from the user. The first can be a password or PIN (personal identification number). The second can be a code or message authentication code sent to a mobile device or a biometric method like a fingerprint or retina scan. Both forms of information are needed to access the secured account. While 2FA increases the security of your account, it is not foolproof.

Financial literacy

Financial literacy is understanding the concepts and products behind money management. Ultimately, it means being able to manage your money wisely. It goes beyond budgeting. Financial literacy refers to a more comprehensive knowledge and skills that enable people to make competent financial decisions.

Compound interest

Compound interest is more than just earning interest on your principal. It refers to when the accumulated interest is added to the principal balance. The total balance then makes more interest, thus compounding your returns. With compound interest, the growth of your money compounds over time.

Diversification

Diversification is the act of spreading investments within and across various asset classes. It is an investing strategy employed to manage risk. Instead of concentrating investments on one type of instrument, company, asset class, or sector, investors diversify to reduce a portfolio’s risk and volatility. Since it usually smooths out sharp swings among investments, it tends to minimize loss. However, one disadvantage of diversification is that it limits gains.

Risk tolerance

Risk tolerance is defined as the acceptable deviation from the level set by one’s risk appetite and investment objectives. Although risk tolerance and risk appetite go hand in hand, they don’t mean the same thing. Risk appetite is the amount of risk an individual investor or organization is willing to accept to achieve specific financial goals.

Asset allocation

Asset allocation is the act of dividing investments across different assets. Examples of such assets are cash, stocks, and bonds. The decision to allocate is personal and works according to an investor’s preference. It also changes depending on your life phase, time horizon, and risk tolerance.

Mutual funds

Mutual funds are defined as collective investments that pool money from many investors. These funds invest in various assets like stocks or bonds and are managed by professionals who select the investments. They help diversify portfolios by allowing investors to buy into several types of investments with one purchase. Examples of mutual funds include target date funds, bond funds, and index funds. Passively managed mutual funds are cheaper, while actively managed ones are more expensive.

ETFs

ETFs or exchange-traded funds are defined as investment funds that allow you to purchase a large basket of individual stocks or corporate and government bonds in a single purchase.

Indices

Indices use standardized methodology to measure the price performance of baskets of securities. They are used to measure these baskets of securities, which are intended to represent or replicate specific market areas.

Tips for a Smooth Shift from Physical or Traditional to Digital Finance

Financial literacy is critical to transitioning from traditional financial services to digital finance or fintech platforms. Digital financial literacy is a significant barrier to fintech adoption, so learning about the analogous features between conventional and digital instruments is essential before shifting.

It pays to master digital security to avoid costly mistakes and prevent fraud. Practicing optimal online security protects your accounts from vulnerabilities. Don’t give your personal data too easily—those new to digital finance are often complacent about providing data even when unnecessary. Email forwarding, like ForwardMX, is a great way to give each digital finance platform and bank a unique email address and protect your online security.

Use Digital Finance To Achieve Financial Autonomy

As economies lean towards increasing digitization and automation, digital financial literacy will become essential to surviving and thriving financially. Individuals must become more proactive in their financial planning as the trend is moving towards products and services requiring higher financial sophistication and effective use of fintech apps.

Retirement is often characterized by less access to financial services, less income, and less autonomy, becoming more dependent on trusted caretakers for decisions over time. You can reverse these trends by being digitally savvy and taking charge of your accounts, financial planning, and investments through digital financial tools. They minimize the need for physical brokers and intermediaries and thus lower the costs or fees for you to join.

Far from a mere trend for the young, digital tools provide financial inclusion and empowerment for older adults. It’s essential to learn about new financial technologies and catch up with the times to reap the benefits of such tools.

Featured Image Credit: Photo by Antoni Shkraba; Pexels

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