Quantum Computing in Banking and Finance – Threat or Opportunity?
What do companies such as J.P. Morgan, Wells Fargo, Barclays, Mitsubishi Financial Group, Citigroup, Goldman Sachs, or Caixa Bank have in common (besides being banking and financial giants)? They have all started to invest in and experiment with quantum computing applications.
Even though it is an emerging technology that still needs to mature in many ways to fulfill its wide range of promises, quantum computing has already started to make its way into various industries. The business world now faces steady pressure to familiarize itself with the technology, assess its potential, find specific use cases, and decide upon a potential long-term strategy.
Quantum computers are an entirely new type of hardware operating on quantum physics principles. While traditional computers use bits and a binary system of representing the information (either zero or one), quantum devices store the information in qubits, which can find themselves in a particular state, superposition (both zero and one at the same time). This allows them to process a vast amount of information significantly faster than classical devices. However, quantum hardware technology still needs to develop; therefore, most of the advantages that quantum computers offer compared to conventional computers are almost entirely theoretical.
Companies in the banking and financial sector are already experimenting with this technology to either harness its potential or take precautions with regard to its implications.
Quantum computing as a threat
Banks, hedge funds, asset managers, and all types of financial institutions deal with very sensitive customer data as well as information regarding transactions and contracts. Moreover, regulators require this data to be stored for periods ranging from several years to several decades. Therefore, it is paramount that it should remain secure and private. Some of the encryption algorithms used today rely on complex mathematical problems that classical computers cannot solve.
In a keynote presentation at the Inside Quantum Technology 2021 conference, Dan Garrison, who guided the creation of Accenture’s Quantum Computing Program, mentioned that if all classic computers would work together to break an encryption key (e.g., the one protecting a bank account), this would take approximatively 14 billion years. However, it has been theoretically proven that a quantum computer would be able to break some types of encryption in a matter of minutes or seconds, and several algorithms that can do that have already been developed.
Quantum hardware hasn’t yet reached the necessary level of development to run such algorithms. Nevertheless, as soon as large-scale, fault-tolerant universal quantum computers become available, there is a risk that all the data and private information concerning people, businesses, and transactions may be exposed. Some scientists expect this to happen in the next decade. Based on the principle “harvest now, decrypt later,” it is believed that nefarious actors are now hoarding encrypted data, with a view to accessing it as soon as more powerful quantum devices become available.
Therefore, by starting to use quantum-resistant algorithms already at this stage, the data owners could protect their information in the future, too.
“In the Finance sector, which deals with sensitive and private information, our greatest concern is what we call post-quantum cryptography (PQC). This refers to the landscape of privacy, cryptography, and encryption after the day when quantum computers become capable of breaking many of today’s encryptions. Post Quantum Cryptography should be something that is on everybody’s mind.” Peter Bordow, Principal Systems Architect for Advanced Technologies at Wells Fargo.
Quantum computing as an opportunity
Optimal arbitrage, credit scoring, derivative pricing – all these financial procedures involve many mathematical calculations and become even more complicated and resource-intensive as the number of variables increases. At some point, people have to settle for less-than-optimal solutions, because the complexity of the problem surpasses the capabilities of current technology and methods.
These so-called intractable problems (that can’t be solved by a traditional computer in a reasonable amount of time) represent the best use-cases for quantum technology.
One of the most acclaimed applications of quantum computing in the financial sector are the accurate simulation of markets and the ability to predict how a change in a commodity price will influence the cost of other assets.
According to experts in the field, quantum computers would be to perform so-called Monte Carlo simulations to forecast future markets, predict the price of options, or assess risk and uncertainty in financial models.
By optimizing machine learning and employing algorithms capable of recognizing patterns in large amounts of data, quantum computers could perform these highly complex forecasts and predictions.
Trading and portfolio optimization are other areas where quantum computing could significantly help. Having to consider the market volatility, customer preferences, regulations, and other constraints, traders are currently limited by computational limitations and transaction costs in simulating a large number of scenarios and improving portfolio diversification. Scientists have already proved that quantum technology can deal with the complexity of these problems.
Currently, Dharma Capital and Toshiba have joined forces in exploring the potential of quantum computers in assessing the effectiveness of high-frequency trading strategies for listed stocks in Japanese markets.
In a panel discussion during the Inside Quantum Technology 2021 conference, Steve Flinter, Vice President within Mastercard’s Artificial Intelligence & Machine Learning Department, declared that Mastercard had already started two years previously to explore use cases for quantum computers. Even though retail banking and payments are not typical use cases for these devices, Flinter believes that besides optimization problems, quantum computers could be successfully employed to make sense of petabytes of data.
Marcin Detyniecky, Group Chief Data Scientist and Head of AI Research and Thought Leadership at Axa Insurance, also points out that in the financial industry, quantum computers could have a positive impact in areas such as foreign exchange optimization, asset allocation, large-scale portfolio optimization, disaster simulations, and risk modeling.
Commercial quantum applications for the financial industry
Of the dozens of quantum software start-ups around the globe, Multiverse Computing and Chicago Quantum have already developed specific quantum solutions for the financial sector and announced encouraging results in the area of portfolio optimization.
Multiverse Computing’s most mature product, an investment optimization tool, is capable of improving asset allocation and management, generating twice the ROI on average while the risk and volatility remain constant. Besides that, the company develops quantum-inspired solutions to predict financial crashes, determine anomalies in big unlabeled datasets, and identify tax fraud.
Chicago Quantum’s proprietary algorithm identifies efficient stock portfolios and, according to the company, “is currently beating the S&P 500 and the NASDAQ Composite 100 indices”.
In terms of quantum security for financial institutions, there are already several companies on the market offering quantum encryption devices and solutions. QuintessenceLabs offers data-protection solutions and encryption keys based on quantum technology, designed to withstand any malicious attacks both from classical and quantum computers. ID Quantique is also commercializing a quantum random number generator, along with quantum-safe network encryption and quantum key distribution solutions. Similar services are provided by Cambridge QC, evolutionQ, IBM, Infineon, ISARA, and Microsoft, to name but a few.
“Wait and watch” or “go ahead”
The future development of quantum solutions within the financial and banking industry is not without challenges. Finding out which problems are suitable to be tackled by quantum computers and which not, increasing the interface accessibility and the availability of software, extending the interest in this technology beyond an elite group of mathematicians and physicians – these are only a few of the challenges that this field will have to deal with in the future.
However, experts have warned that adopting quantum-based solutions is a long and complex process that depends not only on the company’s capacity to define problems, migrate data, and adjust the infrastructure but also on its ability to include suppliers and clients in this process as well.
“This is a long game. It is not a light switch that you flip, and suddenly you’re all done in a few months, and you’ve mitigated all your risk exposure.” Peter Bordow, Principal Systems Architect for Advanced Technologies at Wells Fargo
Nonetheless, quantum computing technology is not fully developed yet, and most of its applications and promised benefits are still conceptual. Therefore, companies in the financial and banking industry are faced with two alternatives: To wait and watch, or to go ahead. The first option implies ignoring emerging trends and reacting only when the threats or the opportunities have been identified. The second one relies on a more proactive approach, where companies already start to familiarize themselves with the quantum technology, identify use cases, and start testing the integration of quantum security solutions. This option might prove more valuable in the long run and help them mitigate future risks.
Find out more about the expected breakthroughs in quantum computing. Read our report, Supertrends in Quantum Computing, for a complete overview of quantum technology, as well as key players and investors in this field.
© 2021 Supertrends
Egger, Daniel D, Gambella Claudio, Marecek Jakub, McFaddin Scott, Mevissen Martin, Raymon Rudy, Simonetto Andrea, Woerner Stefan, and Yndurain Elena. 2020. “Quantum Computing for Finance: State of the Art and Future Prospects.” IEEE Transactions on Quantum Engineering, vol. 1 (IEE Transactions ) 1-24.
Wells Fargo. 2020. Post-Quantum Cryptography (PQC) and the Quantum Threat. Position Report, San Francisco: Wells Fargo.