Quantum banking is perhaps one of the least advocated trends in financial services today – but 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 payment mechanism that is also cheaper to run, as it removes the so-called middlemen that have often been needed in traditional peer-to-peer payments.
What is quantum computing and how does it work?
Suhail Bin Tarraf, Group Chief Operations Officer at First Abu Dhabi Bank, says: “Computers today use bits to run operations, but a quantum computer uses qubits to perform multi-dimensional algorithms in real time. Just 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, undergo incompatible measurements, and be entangled with other quantum bits – creating a variety of unique combinations. Recent developments in exploiting these unique properties make qubits much more powerful than classical bits.”
Duke Munoz, sales representative at TechEniac, continues: “In quantum computing, 0s and 1s can coexist, or even intertwine, leading to a multitude of computations even with the same input data.
“This revolutionary technology has enabled a more secure, efficient and counterfeit-resistant financial system, making it a promising development in the financial world.”
So promising, in fact, that MarketsandMarkets predicts that the global quantum computing market will reach $1.77 billion by 2026, up significantly from $472 million in 2021, with a CAGR 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.
Speed a considerable advantage of quantum banking
One of the most significant advantages that quantum banking provides over alternative methods of banking and moving money is the increased speed. Quantum computers can process data 10 million times faster even than supercomputers, highlighting the astonishing capabilities this emerging technology possesses.
The authors of an IBM report on quantum banks explain the technical advantages lurking under the hood: “The solution space of a quantum computer is orders of magnitude larger than traditional computers – even immensely powerful. This is because doubling the power of a classical computer requires roughly twice the many transistors working on a problem. The power of a quantum computer can roughly double every time just one qubit is added.”
This system, in turn, provides powerful benefits for financial institutions and other actors in the banking sector – and it does not go unnoticed by the industry. A recent report published by Temenos surveyed 300 retail, commercial and private banking executives around the world. Among other things, it found that 63% of executives believed that new technologies – including quantum computing – would have the biggest impact on banks over the next five years, compared to just 34% for the second most popular trend: changing customer behaviour.
This figure is a couple of percentage points lower than it was two years ago, indicating some dampening of expectations due to COVID-19, but significantly higher than it was in 2019 – the last full year unaffected by the pandemic – with just 42% of managers was surveyed as part of Temeno’s 2019 research and said these technologies would be the biggest driver of change.
When the survey was published, Jonathan Birdwell, Global Head of Policy and Insights for Economist Impact, which conducted this survey on behalf of Temenos, argued that banks were aware of the burden these expectations placed on them: “New technology and customer demands are the two main the trends expected to impact banks over the next five years. To maintain their direct connection to the consumer, banks are realizing that they must become true digital ecosystems.”
Risk management among other quantum use cases
Another important use case for quantum banking is around risk, which continues to be an operational struggle for banks of all sizes. Quantum computing can perform transaction sizes 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 argues that CROs face an extraordinary volume and variety of risks, both traditional and new, all of which appear to be growing with urgency. Yet their biggest challenge lies in understanding how these risks intersect to create potential points of failure within their organization, even when traditional risk management metrics look solid.
“Cyber risk is top risk priority for the next 12 months, according to CROs,” the study says. “However, credit risk may soon become more of a focus if economic conditions worsen.” It is clear, then, that this calls for improved technology to help financial institutions manage the multitude of risks they face on a daily basis. Could quantum banking be a solution?
First-movers will secure an early advantage
Authors of a UK Finance report previously wrote: “Quantum computing will have applications in financial services, changing the way we approach investment, risk, AI and security and offering financial services firms that seize the opportunity an early advantage.
“Financial services firms should consider how they prepare for the quantum computing technology that looks set to transform the market. Failure to do so risks others developing the ability to move faster in the short term and attract the resources that will be critical to long-term success.”
Suhail Bin Tarraf, Group Chief Operations Officer at First Abu Dhabi Bank, continues: “Beyond risk management, quantum supercomputers will lead to a range of banking functions, such as analyzing large areas of unstructured data to make financial predictions or simulating investment portfolios. It will lead to a greater understanding of the financial markets and economic booms or busts as well as asset allocation management.
“Experts believe that the commercialized use of quantum computers is still about a decade away. Scalability, cost, maintenance, legacy technology and regulatory scrutiny are some of the challenges for banks. But early adopters will likely have an advantage and the chance to gain a competitive foothold will not be free for long.”
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