How will quantum computing affect the future of financial services?

A complex but key technology for the future, quantum computers originally appeared in the 1970s, underwent many developments in the 2010s, but are still in its infancy today. Quantum computation is of great interest to all sectors as its capacity is infinite and opens up a field of possibilities, especially in terms of computational capacities that go beyond human understanding. This new technology promises a major impact for many industries, including primarily banking, financial services and insurance companies (BFSI), which are often at the forefront of cutting-edge technology adoption. The sector is in fact one of the privileged recipients of quantum computation, as exponential financial data today is sensitive to our economy. The complexity of the decision-making process and market variables also characterize this sector. And the quantum computer’s main advantage in speed, accuracy and predictable analysis can be a real game-changer for banks and financial service providers.

But what is quantum computation? How can this concretely change the situation for the BFSI sector?

Demystifying quantum computers

Traditional computers operate on a binary system with 1s and 0s and store information in bits. Quantum calculation, 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 about the duality of matter and the principle of uncertainty). This superposition eliminates binary constraints and opens up the possibilities of calculation.

This can be a game-changer for the banking and finance sector, where quantum algorithms can be used for computationally dense models that use a large number of variables. Thus, financial service institutions can use quantum calculations for calculations that are not achievable with traditional computing, resulting in greater accuracy, faster decision making, and redesign of business processes.

Experts say quantum computers will bring massive benefits to the financial sector. Here are some of the potential benefits that may appeal to early adopters who want to gain a competitive edge in this industry.

Solve the so-called unsolvable problems

Many complex economic procedures involve lengthy mathematical calculations, which become more tedious and time-consuming as the number of variables increases. For example, optimal arbitrage, credit scoring, pricing of derivatives are all procedures that involve complex mathematical calculations that intensify as the number of variables increases. The complexity of these issues often exceeds the capabilities of current computer technology.

These insoluble scenarios are the best examples of quantum computation, an example of an application in financial services is the precise simulation of the market. This is the ability to predict the effect of a change in the price of a raw material on the price of other assets.

By utilizing machine learning and quantum algorithms that are capable of decoding patterns in large amounts of data, quantum computation can make predictions and predictions of great complexity.

2. Determination of profiles and risk management

Financial institutions must constantly manage risks and assess compliance. While traditional IT technologies do a good job of minimizing risk, some areas such as liquidity management, derivative 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 risk exposure analysis. Quantum computing can help these companies create advanced economic models with multiple variables and variances to best fit the risk profile. With techniques such as quantum annealing (quantum annealing), it is possible to improve the optimization of portfolios. Take the case of Spain’s CaixaBank, which combined traditional data processing with quantum technology to work on different calculation stages to rank credit risk profiles. The first bank in Spain will be the first in the world to use quantum computing to calculate the coverage of investment portfolios in the insurance sector. By using quantum computing, CaixaBank has experienced a 90% reduction in time to solve hedging problems and optimize investment portfolios, among other business benefits.

Banks can use these and similar apps to dramatically reduce the time it takes to assess risk.

3. 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 financing.

The number of variables involved in trading and portfolio optimization includes market volatility, client preferences, compliance and other factors. Currently, the simulation of so many scenarios faces 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.

Next-generation cybersecurity and cryptography

In the future, existing encryption standards will be very vulnerable to quantum attacks, making cybersecurity a significant part of quantum computers. The financial industry will need to proactively design a post-quantum crypto strategy. 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 computer technology will not occur until a few years from now. But organizations like JP Morgan Chase & Co, HSBC Bank, BNP Paribas, Credit Agricole have already started experimenting with this technology to take advantage of its benefits.

As technology evolves, it will become a business imperative for financial institutions. They will have to weigh the strategic benefits and risks to fulfill the promise of quantum computers 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, achieve management acquisitions and choose the right implementation.

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