February 27, 2024

How quantum computing could transform the banking sector

Quantum banking is perhaps one of the least championed trends within financial services today; however, it still has the potential to have a significant impact on the financial system.

It revolves around quantum computing and blockchain to build a faster payments mechanism that is also cheaper to operate, because it eliminates the so-called middlemen that have often been necessary in traditional peer-to-peer payments.

What is quantum computing and how does it work?

Suhail Bin Tarraf, Group Chief Operating Officer of First Abu Dhabi Bank, says: “Today, computers use bits to execute operations, however, a quantum computer uses qubits to perform multidimensional algorithms in real time. Like classical bits, a quantum bit must have two separate states: one representing 0 and one representing 1.

“However, a quantum bit can also exist in superposition states, be subject to incompatible measurements, and become entangled with other quantum bits, creating a multitude of unique combinations. Recent advances in harnessing these unique characteristics make qubits much more powerful than classical bits.”

Duke Muñoz, sales representative at TechEniac, continues: “In quantum computing, 0 and 1 can coexist, or even entangle, generating a multitude of calculations even with the same input.

“This revolutionary technology has enabled a more secure, efficient and counterfeit-resistant financial system, making it a promising development in the world of finance.”

In fact, it’s so promising that MarketsandMarkets forecasts the global quantum computing market will reach $1.77 billion in 2026, up significantly from $472 million in 2021, registering a compound annual growth rate of over 30%. . If adopted correctly, financial services could be one of the biggest proponents of quantum computing, benefiting from this value creation in the process.

Accelerate a considerable advantage of quantum banking

One of the most considerable advantages that quantum banking offers over alternative methods of banking and money movement is greater speed. Quantum computing can process data 10 million times faster than even supercomputers, highlighting the astonishing capabilities of this emerging technology.

The authors of an IBM report on quantum banking explain the technical advantages under the hood: “The solution space of a quantum computer is much larger than that of traditional computers, even immensely powerful ones. This is because doubling the power of a classical computer requires about twice as many transistors working on a problem. “The power of a quantum computer can be roughly doubled every time just one qubit is added.”

This system, in turn, offers powerful advantages to financial institutions and other players within the banking space, and is not going unnoticed by the industry. A recent report published by Temenos surveyed 300 retail, commercial and private banking executives worldwide. Among other things, it found that 63% of executives thought new technologies – including quantum computing – would have the biggest impact on banks in the next five years, compared to just 34% who thought the next biggest trend cited was: changing customer behavior.

This figure is a couple of percentage points lower than two years ago, suggesting a slight moderation in expectations due to COVID-19, but significantly higher than 2019 (the last full year that was not affected by the pandemic), with only 42% of executives. surveyed as part of the 2019 Temenos research saying that these technologies would be the biggest driver of change.

At the time the research was published, Jonathan Birdwell, global director of policy and insights at Economist Impact, which conducted this survey on behalf of Temenos, said banks were aware of the responsibility these expectations placed on them: “New technology and Customer demands are the two main trends expected to affect banking in the next five years. To maintain their direct connection with the consumer, banks are recognizing that they must become true digital ecosystems.”

Risk management among other quantum use cases

Another important use case for quantum banking revolves around risk, which remains an operational tug-of-war for banks of all sizes. Quantum computing can perform operations of magnitude faster, meaning that complex financial information, such as data used to assess credit risk, for example, can be analyzed quickly and with greater accuracy.

A study published earlier this year by Ernest & Young (EY) highlights the complex risk landscape in which banks operate: it states that CROs face an extraordinary volume and variety of risks, both traditional and emerging, that appear to be gaining urgency. . However, your biggest challenge lies in understanding how these risks intersect with each other to create potential points of failure within your organization, even when traditional risk management metrics appear stable.

“Cyber ​​risk is the top priority for the next 12 months, according to CROs,” the study says. “But credit risk could soon become a focus if economic conditions worsen.” Clearly, then, this requires improved technology to help financial institutions manage the myriad of risks they face daily. Could quantum banking be a solution?

First movers will secure an early advantage

The authors of a UK Finance report previously wrote: “Quantum computing will have applications across financial services, transforming the way we approach investment, risk, artificial intelligence and security and offering financial services firms that Seize opportunities an early advantage.

“Financial services companies should consider how they prepare for the quantum computing technology that is sure to transform the market. Failure to do so risks allowing others to develop the ability to move faster in the short term and attract the resources that will be essential for long-term success.”

Suhail Bin Tarraf, Group Chief Operating Officer of First Abu Dhabi Bank, continues: “Beyond risk management, quantum supercomputing will lead to a variety of banking capabilities, such as analyzing large areas of unstructured data to make financial predictions. or simulate investment portfolios. It will lead to a greater understanding of financial markets and economic booms or busts, as well as asset allocation management.

“Experts believe commercial use of quantum computing is still a decade away. Scalability, cost, maintenance, legacy technology and regulatory scrutiny are some of the challenges that await banks. However, the early adopters are likely to have an advantage and the opportunity to gain a competitive foothold will not be open for long.”

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