With quantum computers approaching a level of sophistication that will warrant near-term applications, financial institutions are exploring ways through which they can exploit these exciting new technologies. For example, JP Morgan has partnered with several quantum technology hubs, including the Chicago Quantum Exchange, to develop algorithms that can be applied to artificial intelligence, optimisation and cryptography.
Meanwhile, Goldman Sachs has teamed up with a quantum-computing start up, QC Ware, to explore how new capabilities can speed up financial calculations and artificial-intelligence-based decision making. To appreciate the transformational potential of quantum computing, it is prudent to understand how it delivers superior processing capabilities.
The key difference stems from the units of data, bits for conventional computers and qubits for quantum computers. Bits are constrained to binary values i.e. data either takes the value of 1 or 0, whereas qubits are much more flexible and permit the value to be either 0 and 1 independently, simultaneously or in a state of superposition (the ability to be in multiple states at the same time). The effectiveness and speed advantage of qubits become clearer when looking at some quantum computing use cases, for example many modern cryptographic protocols are secured by factoring large composite integers (integer factorisation). For a traditional computer, integer factorisation would require the division of the integer by every number smaller than its square root to see which numbers are factors. As integers become larger, the number of required calculations increase. However, due to the flexibility of qubits, quantum computers can perform a test for factorisation on many numbers smaller than the integer simultaneously, meaning only a few calculations are required to find the correct answer.
This means that qubits process computational and algorithmic calculations at speeds several orders of magnitude faster than conventional computers. Google has claimed that one of its most advanced quantum computers, Sycamore, solved a computational task that would have taken a traditional supercomputer 10,000 years within 3 minutes. However, before getting too carried away, the current state-of-the-art means that quantum computers are extremely sensitive to their operating environment. For example, they need to be stored at -273 degrees, so we won’t see their appearance in the office anytime soon.
Despite current drawbacks, it is clear that the speed and data processing advantages of quantum computers offer a significant revenue opportunity and huge potential to transform processes across the financial ecosystem. Below are three areas where quantum computers can be applied within financial services: financial security, investment portfolio optimisation and fraud detection.
Financial services activities potentially benefiting from quantum computing
Financial data embedded with quantum cryptography is significantly more secure than other forms of digital security. As qubits are in a constantly changing state, decryption is much more difficult and promises a more powerful form of security encryption
An iteration of quantum cryptography is being used to safeguard financial data today. A ‘quantum distributed key system’ offers secure digital communication by encrypting messages such that they cannot be read by parties other than the intended recipient
This technology is extremely applicable to the payments and online banking sectors and is already being integrated by banks such as ABN AMRO
The key aim for investment portfolio optimisation is to select a combination of assets that will maximise returns adjusted for investor and risk profiles
Currently, portfolio optimisation is severely restricted by computational limits and transaction costs, as investors struggle to include market volatility and life-event changes into portfolio optimisation calculations
BBVA Asset Management collaborated with Fujitsu and performed a proof of concept to understand if portfolio optimisation calculations are more efficient when using quantum technologies
The proof of concept used the Fujitsu Digital Annealer “a quantum-inspired hardware system that uses traditional algorithms to simulate the technology’s characteristics” and found that quantum-based technologies construct more efficient portfolios when more than 100 assets / factors are introduced into the portfolio
It is estimated that financial institutions lose between USD 10bn to 40bn in revenue due to fraud and inadequate data management practices
Given its strong predictive power, financial institutions are heavily investing in quantum computing to augment, and one day potentially replace, their fraud detection capabilities. The use of qubits allows quantum computers to realise patterns, perform classifications and make predictions not possible today due to the challenges of complex data structures
The efficient pattern recognition of quantum computers makes it better positioned to identify, predict and avert fraud than current financial systems When assessing the viability of quantum computing in FinTech, one must pay attention to current barriers to entry. While we are still some way out from mainstream adoption, the FinTech community must stay ahead of the curve and keep up to date with fast moving developments — not least because the technology has the potential to impact all verticals of FinTech. Quantum cryptography alone can optimise financial data security for neobanks, payments companies and alternative financing providers. Thus, as technology progresses it is evident that quantum computing’s influence on the financial sector will only continue to grow – offering an exciting future for the whole FinTech community.