A complex but key technology for the future, quantum computing originally appeared in the 1970s, underwent many developments in the 2010s but is still in its infancy today. Quantum computing is of great interest to all sectors as its capacities are infinite and open up a field of possibilities, particularly in terms of calculation capacities that go beyond human understanding.
This emerging technology promises a major impact for many industries, foremost among which are banking, financial services and insurance (BFSI) companies that are often at the forefront of cutting-edge technology adoption. The sector is in fact one of the privileged beneficiaries of quantum computing as exponential financial data is today sensitive for our economy. The complexity of the decision-making process and market variables also characterize this sector. And quantum computing’s key advantage in speed, accuracy and predictive analytics can be a real game-changer for banks and financial service providers.
But what is quantum computing? How can it concretely change the situation for the BFSI sector?
Demystifying quantum computing
Traditional computers operate on a binary system of 1s and 0s and store information in bits. Quantum computing, on the other hand, is based on the principles of quantum physics. It involves the processing of information stored in the form of quantum bits or qubits which can be either 0, 1 or both 0 and 1 simultaneously (according to quantum concepts of the duality of matter and the uncertainty principle). This superposition eliminates binary constraints and opens up the field of possibilities in terms of calculation.
This can be a game-changer for the banking and financial services industry, where quantum algorithms can be applied to computationally dense models that use a large number of variables. Financial services institutions can thus use quantum computing for calculations that are not achievable with traditional computing, resulting in greater accuracy, faster decision-making and business process redesign.
Experts say quantum computing will bring massive benefits to the financial services industry. Here are some of the potential benefits that may appeal to early adopters looking to gain a competitive edge in this industry.
1. Solve so-called insoluble problems
Many complex financial procedures involve lengthy mathematical calculations that become more tedious and time-consuming as the number of variables increases. For example, optimal arbitrage, credit scoring, derivatives pricing are all procedures that involve complex mathematical calculations that intensify as the number of variables increases. The complexity of these problems often exceeds the capabilities of current computing technology.
These unsolvable scenarios are the best use cases of quantum computing, an example of an application in financial services is the precise simulation of the market. This is the ability to predict the impact of a change in the price of a raw material on the cost of other assets.
By leveraging machine learning and quantum algorithms that can decode patterns in large amounts of data, quantum computing can make predictions and predictions of great complexity.
2. Determination of profiles and risk management
Financial institutions must constantly manage risk and assess compliance. While traditional IT technologies do a good job of minimizing risk, some areas such as liquidity management, derivatives pricing and risk measurement require complex IT.
The need to balance risk and hedge positions and perform various stress tests for compliance makes scaling difficult. Many financial firms are exploring quantum solutions to accelerate financial models, such as Monte Carlo simulations and option pricing, which can adjust portfolios based on real-time analysis of risk exposure. Quantum computing can help these companies create advanced economic models with more variables and deviations to best fit the risk profile. With techniques such as quantum annealing, it is possible to improve the optimization of portfolios. Take the case of Spain’s CaixaBank, which combined traditional computing with quantum technology to work at different computational stages to rank credit risk profiles. The first bank in Spain becomes the first in the world to apply quantum computing to calculate the coverage of investment portfolios in the insurance sector. Using quantum computing, CaixaBank has seen a 90% reduction in time to solve hedging issues and optimizing investment portfolios, among other business benefits.
Banks can use these and similar apps to dramatically reduce the time it takes to assess risk.
3. The impact on trade finance
Quantum computing is likely to have a huge impact on trade finance. By leveraging technologies such as blockchain and cryptography, quantum computers will dramatically speed up verification processes and trade finance.
The number of variables involved in trading and portfolio optimization include market volatility, client preferences, conformities, and other factors. Currently, the simulation of so many scenarios comes up against computational limitations and high transaction costs. Fortunately, quantum computing can reduce the complexity of today’s business environments.
Quantum computing also benefits trade finance by using a more resilient form of security than existing encryption algorithms.
4. Next-gen cybersecurity and cryptography
In the future, existing encryption standards will be highly vulnerable to quantum attacks, making cybersecurity an essential part of quantum computing. The financial industry will need to design a post-quantum crypto strategy proactively. Quantum cybercriminals will need quantum encryption to prevent data breaches and threats. Using quantum key distribution (QKD) to encrypt and transmit virtually tamper-proof data will become the norm.
Although this is a very sophisticated approach to computing, commercial application of quantum computing technology will not occur for a few years. But organizations such as JP Morgan Chase & Co, HSBC Bank, BNP Paribas, Credit Agricole have already started experimenting with this technology to benefit from its advantages.
As technology evolves, it will become a business imperative for financial institutions. They will need to weigh the strategic benefits and risks to deliver on the promise of quantum computing and maintain the first-come, first-served advantage. A crucial step in this direction would be to identify the most specific and relevant use cases for an industry, build a team that is tech-savvy, gain management buy-in, and choose the right Implementation.