Banking on a quantum-powered future for financial services

Quantum Computing was a remote idea a few decades ago, with researchers theorizing its massive potential. However, its leapt forward in evolution, nearing a phase of commercialization. Today, Quantum Computing is fast emerging as the disruptor that can reshape our world, redefine business models, and significantly impact the Financial Services industry, thanks to augmented algorithmic power and superior computing capabilities.

Major financial institutions are taking note and have started engaging in quantum research to create higher value while ensuring unbreakable data security. Large banks, such as Goldman Sachs, JP Morgan, CBA, Barclays, RBS, and Allianz are investing significantly in quantum computing technology. Mastercard has aligned with a strategic partner to develop quantum-hybrid applications for consumer loyalty and rewards, cross-border settlement, fraud management, and anti-money laundering. HSBC is leveraging quantum computing for pricing and portfolio optimization, advancing its net zero goals, and mitigating risks, including identifying and addressing fraudulent activity.

Around the world, governments are also allocating significant budgets to invest in quantum computing. The Chinese government is funding a multi-billion-dollar quantum computing project aimed at making major quantum discoveries by 2030. The National Quantum Initiative Act of the US, signed into law in 2018, lay down a five-year investment of $1.2 bn in quantum information research. Germany plans to spend about $2.4 bn to develop its first quantum computer and related technologies.

Harnessing Quantum Advantage

What makes quantum computing a game changer is its foundation in quantum mechanics. Quantum computing essentially takes advantage of two properties of quantum behaviour – Superposition and Entanglement.

A classical computer uses binary bits that can only depict either a “1” or a “0.” It encodes information in the form of these bits. Contrary to this, quantum computing uses quantum bits or qubits. A qubit can have more than one value, i.e., 1, 0, or some value in between. Therefore, unlike a bit, which has only one value at a time, a qubit can have two or more states simultaneously. This property is called superposition. This allows quantum computers with an exponential set of states to explore, enabling them to solve very large and complex computational problems faster.

Entanglement in the Quantum world on the other hand refers to any two qubits that are strongly correlated, such that the state of one qubit cannot be determined without the knowledge of the state of the other, ensuring secure communications. Changing the state of an entangled qubit will immediately change the state of the paired qubit. Quantum computing takes advantage of this entanglement to encode problems that exploit interdependence between qubits.

The financial services sector is perfectly placed to exploit the quantum advantage. The sector will witness a massive technological breakthrough in ensuring secure processes, data, and transactions, by deploying it. A few potential examples of quantum-powered financial services applications, identified by the Everest Group, include:

  • High-frequency trading: Quick execution of complex and quantitative buy-sell strategies will improve a financial firm’s ability to generate greater returns while controlling risk.
  • Fraud detection: Quick and accurate identification of fraud indicators to enable proactive fraud risk management.
  • Asset valuation: Efficient risk analysis by uncovering intelligence from large information sets and processing data at lightning speeds.
  • Transaction Optimization: Improved efficiency in clearing large batches of transactions that have varying credit, collateral, and liquidity constraints.
  • Clustering: Effective grouping of seemingly disparate sets of assets to enable the discovery of patterns in areas, such as asset performance, consumer sentiment, and risk aversion.
  • Quantum-proofing of cybersecurity systems: Next-generation cryptography to safeguard confidential customer data.

Additionally, Quantum computing will have a profound impact on today’s enabling technologies, such as cryptography and AI, which are transforming Financial Services on various fronts. This impact will further challenge the status quo, for which financial organizations must gear up, and quickly.

The Quantum Impact

The most significant impact of Quantum Computing has been anticipated in the field of Cryptography. The stability of today’s financial systems heavily relies on Cryptography. Cryptography provides the foundation for secure data transmission and storage, as well as for authenticating trusted transactions. Any compromise to it can lead to a global financial crisis.

Emerging technologies like blockchain leverage public key cryptography to secure cryptocurrencies. Security of public key cryptography, which is based on traditional mathematical formulas, is bound in possibilities by the limited computation powers of digital computers.

In contrast to this, superposition allows a quantum computer to try all the paths at once, hence factoring incredibly large numbers efficiently. This drastically reduces the time to find a solution as the number of steps required to crack cryptographic algorithms is drastically reduced. If large and powerful quantum computers begin to exist on a widespread scale, the power of many public-key cryptographic algorithms could be rendered virtually obsolete, eventually catalyzing the need for quantum-safe cryptography algorithms.

The positive impact of Quantum Computing on the effective usage of AI will help bring significant capability improvements and new performance-level benchmarks to AI algorithms. Due to the limitations that classical computers entail, huge amounts of data remain largely unprocessed, and the potential of AI hasn’t been plausibly tapped into yet. Data collection and accumulation volumes are expanding exponentially. On conventional computers, it takes months to train large transformer models, like OpenAI's GPT-3 which contains 175 billion parameters. Future models will require much more time to train as they are expected to add trillions of more parameters.

Quantum computing promises to tackle that and master it. It can open new opportunities in artificial intelligence, by offering combinatoric processing of very large datasets to make better predictions and decisions. It can help build more scalable predictive models that can deal with huge loads of data as well as add as many variables to the equation as possible without slowing essential processes.

Three key areas of AI as a discipline upon which quantum computing will have a tremendous impact are -machine learning, predictive analytics, and natural language processing. Quantum computing can supply data and process it to analyze it at a more granular level to identify patterns and anomalies. It can help build more scalable predictive models that can deal with huge loads of data as well as add as many variables to the equation as possible without slowing essential processes.

In the Financial Services sector, quantum technologies, with their ability to aid parallel processing, will catalyze a paradigm shift and change the realm of possibilities. It will enable breakthroughs in redefining how we store, manipulate & secure data. With the mainstream adoption of Quantum Computing becoming a close reality, quantum technologies will also mature in tandem and evolve faster than digital computing did. The time is ripe for the industry to build a cohesive ecosystem and be prepared for a quantum-powered future.

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