What do JP Morgan, Citigroup, and Wells Fargo have in common? They all are leveraging Quantum Computing to enhance and transform their operations.
Quantum Computing’s continuous advancements – an influx of private and government capital; CXO adoption stories; a dramatic rise in patent filing; collaborations for Quantum research publications and an exponential increase in search engine results related to Quantum Computing targeted towards different business verticals serve as powerful reminders that the technology is rapidly advancing towards commercial viability.
Among the industries that Quantum Computing has the potential to revolutionize, the Financial Services industry stands out for several reasons. First, the size of the prize is hefty – Quantum Computing is set to generate up to USD 40-45 Bn in revenues in the Financial Services industry alone upon its maturity by 2040 with a CAGR of ~40-42%.
Second, financial institutions are among the most aggressive adopters of advanced technologies. ~70% of financial firms around the world are already leveraging Machine Learning for fraud detection, cash flow predictions, and credit score adjustment. Lastly, as breakthroughs accelerate, investments pour in, and Quantum Computing start-ups proliferate, financial institutions are positioning themselves as early adopters by recruiting Quantum Computing experts and partnering with technology companies.
In Exhibit 2, based on the latest job opening data, 125 Quantum Experts were hired by 21 Financial Institutions as of June 2020. This data has grown almost 4 times in 2022 alone as 23 financial institutions around the world have hired 560+ quantum experts. Out of which, ~60% of these profiles were based out of Europe, ~30% out of the US, and 10% Asia*. (*Note: The actual percentage is significantly larger: lack of availability of data from China limits our insight)
Before the Quantum Computing breakthrough, the Financial Services sector used traditional computers to solve business risk problems. However, with substantial growth in data generation, security threats, business risks, and tighter government regulations, the industry is now in need of more powerful computers. Consequently, many leading financial institutions are exploring quantum solutions in the areas of optimization, simulation & pricing, and quantum-safe cryptography.
We believe that Quantum Computing can revolutionize three capabilities of the Financial Services industry.
Optimization: The complexity of the financial markets has increased drastically due to high trading volumes, stringent government policies, and the evolution of financial instruments. Computational limitations and transaction costs pose constraints in taking into account real-life variables such as market volatility and changing customer life events. Quantum Computing could help break through the complexity of the trading ecosystem and employ its combinatorial optimization capabilities to help investment managers in portfolio diversification and mapping portfolio investments with changing market conditions. BBVA partnered with Quantum Computing start-up Multiverse Computing to optimize a portfolio with a rendering time of fewer than 3 minutes and a 60% ROI. Quantum optimization, thus, replaces combinatorial optimization with more efficient methods that perform real-time assessment of market volatility and process complex data much faster than traditional computers.
Simulation & Pricing: Managing the cost of risk on trades is becoming increasingly difficult for Financial Services firms as liquidity management, derivatives pricing, and risk measurement involve complex calculations that are difficult to perform using classical computers. Additionally, scaling of estimation errors limits the scope of Monte Carlo simulations, which is the preferred technique to analyze the impact of risk and uncertainty in financial models. Thus, in the face of increasingly sophisticated risk-profiling demands and rising regulatory barriers, Quantum Computers can build models with a high number of variables (quadratic fashion) and speed up Monte Carlo simulations by 100x compared to today’s classical techniques. This will help in creating comprehensive risk profiles that facilitate better decision-making. Caixa Bank in Spain developed a hybrid computing model where both quantum and traditional computers work in conjunction at different computation stages to analyze and classify credit risk profiles. This application has enabled financial institutions to reduce the time needed to complete risk analyses significantly.
Quantum-Safe Cryptography: As Quantum developments accelerate, it is believed that Quantum Computers will develop the processing power required to break classic encryption, which is the process used to protect the confidential information of a company. However, this might pose severe repercussions for modern technology. As a result, the research community is designing a full-proof solution known as Quantum-Safe Cryptography, which is the process of creating solutions that can be used by modern computers to make them resistant to conventional and quantum cryptanalysis or efforts to break encryption.
Within Quantum-Safe Cryptography, cryptographic keys or Quantum Key Distribution Systems are tools that use quantum mechanics to encrypt and transmit data in a way that is safe from cyber-attacks both by traditional and quantum computers. After adopting this rudimentary security solution, financial institutions should further devise multi-modal security solution that will safeguard them from security threats in the quantum era. JP Morgan Chase is using quantum-safe cryptography to develop the quantum key distribution system that will secure optical channels, help detect fraud and prevent cyber threats.
Once Quantum Computing becomes commercially viable, ‘Optimization’ is set to derive maximum market value for the Financial Services industry when bifurcating market size by capability area.
In the past few years, companies like JP Morgan Chase, Citigroup, Wells Fargo, and many more have publicly discussed and experimented with quantum technology to explore use cases in the three application areas discussed above. Financial institutions are pursuing investment in and conducting partnerships with Quantum Computing companies around the world. Some of the non-exclusive strategies and activities are listed below.
The most important strategy adopted by financial institutions so far, is partnering with full-stack developers. Full-stack developers like IBM, D-Wave, Rigetti, Honeywell, and a few others put significant efforts into developing an in-house comprehensive Quantum Computing ecosystem by providing end-to-end Services such asin hardware, software, and intuitive user interfaces that are necessary to design, build, and integrate critical subsystems.
A second popular strategy is collaborating with Hyperscalers, who are the best in the game when it comes to providing quantum cloud services to run sophisticated simulations exploring new financial products more efficiently than with conventional computers. Furthermore, access to Quantum Simulators has enabled financial institutions to conduct direct simulations of quantum computers on classical computers, run quantum algorithms, and explore new use cases. Lastly, Hyperscalers are expanding their Quantum Computing capabilities and moving towards full-stack development capabilities by developing quantum hardware and related services in-house.
Thirdly, the idea of partnering with Global System Integrators is gaining traction. GSIs function as strategic partners to identify and explore use cases by integrating hardware and software capabilities. Accenture partnered with D-Wave and the innovation lap at BBVA to navigate how best to use Quantum Computing to gain an advantage over its competitors. Quantum algorithms were developed to identify opportunities for credit scoring, currency arbitrage, and trade optimization trajectories.
Another strategy employed by financial institutions is partnership and investment in Quantum Computing start-ups to get first-hand and exclusive access to technology and knowledge. Partnerships so far have been in the form of financial institutions leveraging quantum software and quantum algorithms developed by quantum start-ups and research collaborations to identify use cases and transform operations of the Financial Services industry.
An important thing to note here is that due to the nascency of this technology, research partnerships with academia and government agencies run in parallel with all strategic endeavors as it helps build subject matter expertise and develop use cases.
Quantum Computing, through its real-time advancements, has solidified its position as a technology that is here to revolutionize and transform computing today and its business use cases. However, we believe there are specific prospects that it can undertake to accelerate the Quantum Computing journey and prepare for the future.
To leverage the potential of Quantum Computing, the first and foremost thing for technology providers is to launch specific programs to enhance quantum literacy among their employees. They could have Quantum Computing leaders take training sessions to help develop an interest in Quantum Computing. Once a group of quantum enthusiasts comes together, engaging with the ecosystem to find prospective partners would become the norm. Additionally, a company-wide handbook maintaining Quantum developments, threats, and opportunities across quantum hardware and software services should be tracked so that companies can build early adopter advantage.
Furthermore, technology providers should focus on building a Quantum Computing network with stakeholders such as strategic partners, research institutions or universities, and Quantum Computing start-ups. Establishing such networks or Quantum Computing communities will provide new avenues for technology providers to speed up research, identify industry-specific use cases based on their strategic goals and prioritize investment in exploring Quantum Computing that is most likely to provide them a competitive advantage. Additionally, regular Quantum Computing conferences, webinars, and roundtables with senior leadership of the member firms that are open for public viewership would help keep the entire Quantum Computing Ecosystem up to date with developments in this domain. IBM has created a vibrant Quantum Network of 180+ Fortune 500 companies, universities, laboratories, and startups in the Network to shape the future of Quantum Computing.
After building a Quantum Network, the next step for tech giants should be to bring resources in the form of Quantum Computing capabilities of all the member firms under one roof to build an innovation/incubation lab. Establishing an incubation lab would help enterprises test and run quantum algorithms on Quantum Computers or make use of Quantum Simulators on their classical computers to analyze the business outcome of the identified use case in real-time.
The convergence of the three mega-technologies Quantum Computing and Artificial intelligence & Machine learning is said to revolutionize the way we see computing today. While Quantum Computing can drive speed, efficiency, and accuracy, its potential is yet to be realized. The key challenge to its application is the amount of energy required to power it, which is said to drain a firm’s resources. Thus, the optimal route would be to combine the capabilities of Quantum Computing, AI &ML. The collision of Quantum Computing with Artificial Intelligence has the potential to enhance financial risk assessment by quadrupling the overall speed of Monte Carlo simulations. Quantum Computing and ML, on the other hand, can help overcome the complexity in trading optimization using the valuation adjustments model for derivative pricing.
Quantum Computing can combat intractable or complex problems in application areas such as optimization, simulation & pricing, and cybersecurity in the Financial Services industry with optimization expected to capture the highest market size beyond 2030. Moreover, multiple industry agnostic breakthroughs to reduce the error-proneness of Quantum Computers further restore our faith in the actualization of a Utopian dream: making the Quantum Computer commercially viable.
Since it is a matter of a few years before quantum solutions enter the mainstream, the window for getting up to speed will not be open for long. Thus, to get the first mover advantage, tech giants should focus their energies on enhancing organizational quantum capabilities, building research collaborations and incubation labs to innovate, enhance business use cases, and tapping the potential of tech convergence of Quantum Computing, AI & ML.