Quantum computing: A new era for financial services

As seen with recent developments such as IBM’s Heron quantum processor or Google’s Willow project contrasted with the subsequent comments from industry leaders such as Jensen Huang, CEO of chip-making giant Nvidia, the rapid rise of emerging technology stocks can be quickly followed by sudden and extreme market corrections.

This boom-and-bust cycle, however, is a familiar pattern in the history of novel technologies, where the tension between short-term hype and long-term, and often uncertain, innovation can leave investors exposed to significant risks.

Whatever the timescales involved, quantum computing is a groundbreaking area of technology that has the potential to redefine the landscape of financial services, and its possible applications for the industry are worth understanding now.

Rooted in the principles of quantum mechanics, but unlike classical computers that process information using bits (representing either 0 or 1), quantum computers leverage qubits, which can exist in a superposition of both states simultaneously. This, coupled with quantum entanglement, where multiple qubits share a unified quantum state, enables quantum computers to perform complex calculations with unprecedented speed and efficiency.

Quantum computing in finance: The opportunities

The transformative potential of quantum computing in financial services is immense, enabling significant value to be delivered in such areas including:

Risk management: Quantum algorithms could revolutionize Value at Risk (VaR) calculations, allowing financial institutions to process vast datasets and complex models in real time. This leads to more precise risk assessments, robust stress testing and stronger mitigation strategies. With faster, more accurate analytics, institutions could more proactively respond to market uncertainties.

Investment and portfolio management: Quantum computing’s ability to solve optimization problems at scale enables enhanced portfolio management by balancing risk and return more effectively. These advanced algorithms could enable institutions to unlock better investment outcomes, gain a competitive edge and deliver tailored solutions to clients.

Trading optimization: Quantum-powered tools can streamline trading processes, improve settlement times and optimize portfolio diversification. The ability to account for multiple variables and scenarios simultaneously can give traders a sharper edge in navigating volatile markets and aligning investments with long-term goals.

Fraud detection and security: Quantum machine learning offers an advanced layer of defense against fraud. By identifying subtle patterns in transaction data, it could detect anomalies and fraudulent activities faster and more accurately than traditional systems. This not only protects customers, but also fortifies financial institutions against emerging cyber threats.

Quantum computing in finance: The risks

As transformative as quantum computing is, it also introduces unique risks such as:

• Cryptographic vulnerability: Quantum computers threaten to dismantle today’s cryptographic foundations. Algorithms like Shor’s algorithm can efficiently break widely used encryption methods, potentially exposing financial transactions and sensitive data.
• “Harvest now, decrypt later” attacks: Malicious actors could collect encrypted data today, with the intent of decrypting it in the future when quantum computers become more powerful. This highlights the urgency for institutions to transition to quantum-resistant cryptographic solutions before the threat materializes.
   

How can financial institutions prepare?

To harness the benefits of quantum computing while mitigating its risks, financial institutions should take the following proactive steps:

• Transition to quantum-resistant cryptography: The National Institute of Standards and Technology (NIST) in the United States has published post-quantum encryption standards¹ designed to withstand the attack of a quantum computer. Adopting these encryption algorithms will be critical for securing data in a quantum-enabled future.
• Explore quantum key distribution (QKD): Leverage quantum mechanics to establish secure communication channels through QKD. While this technology is still evolving, its potential to safeguard encryption keys makes it a promising investment for future-proofing security.
• Develop in-house quantum expertise: Invest in building a skilled workforce that can understand, deploy and manage quantum technologies. This includes upskilling current employees and attracting talent with expertise in quantum computing. 
   

Collaboration: A catalyst for quantum readiness

Collaboration across the financial ecosystem will be critical for successfully navigating the quantum era. Initiatives like Project Leap, spearheaded by the Bank for International Settlements, are fostering partnerships between central banks, regulators and financial institutions to develop quantum-resistant solutions, and ensure system-wide stability. The Quantum Economic Development Consortium also supports the growth of the quantum industry in the US, working together to identify gaps in technology, standards and workforce.

Those who embrace quantum computing early by investing in technology, people and partnerships will not only mitigate potential risks, but will also be well positioned to unlock a future of unparalleled opportunities. The financial institutions that act decisively today will lead the quantum era, raising the bar in innovation, security and efficiency.