How Quantum Computing Affects the Future of Financial Services

How Quantum Computing Affects the Future of Financial Services

Quantum computing, a complex yet important technology for the future, first appeared in the 1970s and underwent much development in the 2010s, but is still in its infancy. Quantum computing is of great interest to all sectors as its capabilities are endless and open up the field of possibilities, especially in terms of computing power beyond human understanding.

This new technology promises to make a huge impact on many industries. Banks, financial services and insurance (BFSI) companies are often at the forefront of adopting cutting-edge technology. This sector is, in fact, one of the privileged beneficiaries of quantum computing, as exponential financial data is sensitive to our economy today. The complexity of the decision-making process and market variables is also a hallmark of this sector. Also, the main advantages of quantum computing in speed, accuracy and predictive analytics can be a true game changer for banks and financial services providers.

But what is quantum computing? How can you specifically change the situation in the BFSI sector?

Unravel the mystery of quantum computing

Traditional computers run on binary systems of 1 and 0 and store information bitwise. Quantum computing, on the other hand, is based on the principles of quantum physics. This involves processing information stored in the form of quantum bits or qubits. This information can be 0, 1, or both 0 and 1 at the same time (due to the quantum concept of matter duality and uncertainty principle). This superposition removes binary constraints and opens up a field of computational potential.

This could be a breakthrough for the banking and financial services industry, where quantum algorithms can be applied to computationally dense models with large numbers of variables. Therefore, financial services institutions can use quantum computing for computations that traditional computing cannot achieve, improving accuracy, speeding decision making, and enabling business process redesign.

Experts say quantum computing will bring tremendous benefits to the financial services industry. Here are some of the potential benefits that may appeal to early adopters seeking to become competitive in the industry.

1.1. Solving the so-called insoluble problem

Many complex financial procedures involve long mathematical calculations that are more cumbersome and time consuming as the number of variables increases. For example, optimal arbitrage, credit scoring, and derivative pricing are all procedures with complex mathematical calculations that are enhanced as the number of variables increases. The complexity of these issues often exceeds the capabilities of current computing technology.

These unresolvable scenarios are the best use cases for quantum computing. An example of an application in financial services is an accurate simulation of a market. This is the ability to predict the impact of changes in raw material prices on the cost of other assets.

By leveraging machine learning and quantum algorithms that can decode patterns of large amounts of data, quantum computing can make predictions and very complex predictions.

2.2. Profile determination and risk management

Financial institutions should constantly manage risk and assess compliance. While traditional IT technology excels at minimizing risk, some areas such as liquidity management, derivative pricing, and risk measurement require complex IT.

Scaling is difficult because you need to balance risk and hedge position and perform various stress tests for compliance. Many financial companies are looking for quantum solutions to accelerate financial models such as Monte Carlo simulations and option pricing that can adjust portfolios based on real-time analysis of risk exposure. Quantum computing helps these companies create sophisticated economic models with optimal variables and deviations for their risk profile. Techniques such as quantum annealing can be used to improve portfolio optimization. Take Caixa Bank in Spain as an example. It combines traditional computing and quantum technology to work at different computational stages and rank credit risk profiles. Spain’s first bank will be the first bank in the world to apply quantum computing to calculate the coverage of its investment portfolio in the insurance sector. By using quantum computing, CaixaBank has solved the hedging problem, reduced the time to optimize its investment portfolio by 90%, and realized other business benefits.

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

3.3. Impact on trade finance

Quantum computing can have a significant impact on trade finance. Quantum computers dramatically speed up the verification process and trade finance by leveraging technologies such as blockchain and cryptography.

The number of variables involved in trading and portfolio optimization includes market volatility, client preferences, suitability, and other factors. Currently, simulations of so many scenarios face computational limitations and high transaction costs. Fortunately, quantum computing can reduce the complexity of today’s business environment.

Quantum computing also benefits trade finance by using a more resilient form of security than existing cryptographic algorithms.

4.4. Next Generation Cyber ​​Security and Encryption

In the future, existing cryptographic standards will become extremely vulnerable to quantum attacks, and cybersecurity will become an integral part of quantum computing. The financial industry needs to actively design post-quantum cryptography strategies. Quantum cybercriminals need quantum cryptography to prevent data breaches and threats. It is standard to use Quantum Key Distribution (QKD) to encrypt and transmit data that is virtually unaltered.

This is a very sophisticated approach to computing, but commercial applications of quantum computing technology will not occur for years. However, organizations such as JP Morgan Chase & Co, HSBC Bank, BNP Paribas and Credit Agricole have already begun experimenting with this technology to take advantage of it.

As technology evolves, it will become a business imperative for financial institutions. They need to weigh strategic benefits and risks in order to fulfill the promises of quantum computing and maintain the benefits of first-come-first-served basis. An important step in this direction is to identify the industry’s most specific and relevant use cases, build a tech-savvy team, earn a management buy-in, and choose the right implementation.