The fear of fintech disruption has forced banks to actively discuss and explore a plethora of transformative technologies like artificial intelligence, cryptocurrency, and the Internet of Things. However, quantum computing, potentially the most disruptive (or even destructive) of them all, receives a relatively small amount of boardroom airtime.

Quantum computers, which use the properties of quantum physics to store data and perform computations, can reach estimated speeds of up to 10 million times that of a classical computer. They therefore have the potential to massively bolster the efficiency and capabilities of banks. However, they are also far more powerful, giving rise to both financial and reputational damage on unprecedented scales. Do banks understand the potential risks and opportunities associated with quantum computers?

What is quantum computing?

Quantum computing uses the unique behavior of sub-atomic particles to create incredibly powerful computers. Unlike classical computers, which use bits, quantum computers use qubits. Like classical bits, qubits eventually have to transmit the information as a one or a zero. However, they are special because they can simultaneously represent both a one and a zero, a condition known as superposition. Entanglement is another key property of quantum mechanics, where entangled qubits cannot be individually described, and their properties depend on each other. This allows for exponential increases in computing power as more qubits are added.

These differences mean that quantum computers have the potential to perform complex simulations and calculations at a speed that surpasses classical supercomputers, but maintaining qubit stability remains a challenge. Quantum computers are also systems that are designed to carry out specific tasks, as opposed to classical computers which are more general-purpose systems.

Quantum opportunities in banking

Financial markets today are complex and chaotic global systems in which fund managers must balance the ever-changing risks and returns of portfolios. Monte Carlo simulations have been used for years to create models but face limitations on classical computers. Quantum computers are believed to be able to revolutionize financial modeling, portfolio optimisation, fraud detection, and customer targeting. JP Morgan and Goldman Sachs are leading the way in exploring quantum computing for finance, focusing on algorithms and applications rather than hardware. JP Morgan has collaborated with Quantinuum on research papers covering topics like option pricing and portfolio optimisation using quantum computers.

In general, quantum computers have the potential to exponentially increase the speed of almost everything banks do from a technological standpoint. For example, they can process digital payments much faster than classical computers, paving the way for near-frictionless capital flow. Risk quantification is a key challenge facing banks, especially concerning cyber risks, which are many and varied. Having a computer that can take unstructured data across multiple risk types and very quickly understand the relationship between different factors could be a game changer for banks in both predicting and understanding the impact of financial market turmoil.

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Quantum risks in banking

It is believed that quantum computers, should they achieve sufficient size and power, could break the encryption methods currently used by banks to secure financial data and transactions, such as Advanced Encryption Standard, Rivest-Shamir-Adleman, and Diffie-Helman. This makes banks susceptible to a form of cyber-attack known as “Harvest Now, Decrypt Later” whereby adversaries store encrypted data over extended periods until they can decrypt it in the future using quantum computers. Banks hold large amounts of sensitive data and are subsequently exploring solutions to protect against quantum threats.

In July 2023, HSBC became the first bank to commercially trial the Quantum Secure Metro Network (QSMN), a project led by BT and Toshiba that uses quantum key distribution (QKD) to secure data transmission between customer sites in London. QKD is a method of encryption that uses the properties of quantum particles to create a key for encrypting and decrypting messages. The key is transferred using entangled qubits. Furthermore, BBVA is a founding member of the Quantum Safe Financial Forum (QSFF), an initiative that aims to share best practices and coordinate actions to address a safe transition to post-quantum cryptography.

Those banks that take proactive measures to incorporate quantum use cases while aiming to protect against quantum threats stand to become leaders in quantum computing. While the potential of quantum may seem like a distant dream, being unprepared for its transformative potential will be far more damaging in the long run than the short-term spending loss of funds from dedicating spending towards the theme.

Suneet Muru is an associate analyst, banking and payments, GlobalData