By Ryan Jackson
Page could be dedicated to the theory, characteristics and technical components that make up quantum computing. At the highest level, quantum computing uses the principles of quantum mechanics (superposition, entanglement, decoherence – don’t worry if that doesn’t make sense) to solve complex problems faster than traditional computers. This multidisciplinary field – comprising computer science, physics and mathematics – has the potential to disrupt and advance many computer-based processes, including financial modelling, artificial intelligence and cyber security.
While it is not critical for most people to understand how quantum computing works, it is a concept of growing importance to industries that use encryption and algorithms, including banking.
How does quantum computing fit into banking?
One way to think about how to prioritize emerging technologies is with McKinsey’s “Three Horizons” model, which buckets technologies and business concepts into “horizons” based on their approach of “managing for current performance, while maximize future opportunities for growth”.
Within the Three Horizons model, “Horizon 3 contains the seeds of tomorrow’s business – options for future opportunities.” Quantum computing, which is part of the broader field of emerging quantum technologies, lives with Horizon 3, although with current progress it may soon find itself in Horizon 2 or 1.
According to Amazon Web Services, “no quantum computer can (currently) perform a useful task faster, cheaper or more efficiently than a classical computer. Quantum advantage is the threshold where we have built a quantum system that can perform operations that are the best possible classical computer cannot simulate in any kind of reasonable time.That said, a number of the biggest technology players (e.g. Amazon, Microsoft, Google) are researching and developing quantum computing services.
Not to be outdone by the big technology companies, many major financial services companies (including JPMorgan, Bank of America, Wells Fargo, BlackRock and Mastercard) have been exploring quantum computing in recent years, and several have made direct investments in quantum computing. start up According to a recent report by the World Economic Forum, government and business investments in quantum technologies reached almost $36 billion worldwide by 2022.
Despite increasing investment in quantum technologies, one of the problems preventing quantum computing from progressing faster is the lack of quantum technology talent. Until the industry grows, and more opportunities arise for less technical talent, startups and established companies will compete for the same limited resources.
Opportunity – and threat
Data is the lifeblood of many industries, and financial services is no exception. Quantum computing is all about analyzing more data faster. And when we think of all the areas of banking that rely on turning data into insight, the potential for quantum computing to generate value becomes clear. For example, consider the following life cycle of a bank customer and how data models are leveraged:
- Marketing to potential customers: marketing models determine advertising campaigns
- Making a loan: underwriting models support prices
- Servicing the loan: risk modeling estimates prepayments and defaults
- Securitizing the loan: portfolio optimization and risk modeling create tradable securities
- Offer new products and services: data models provide insight into customer needs
Using quantum computing has the potential to capture more data points, run models faster and produce more accurate analytics. McKinsey estimates that finance is one of four major industries that have the potential to capture nearly $700 billion in value with quantum technologies as early as 2035.
While quantum computing may eventually offer significant benefits, especially in predictive analytics and simulations, the risk it may introduce to financial institutions (and other industries) cannot be overstated. By far, the biggest emerging threat is nefarious actors (eg criminals, terrorists, and rogue governments) using quantum computers to break public key encryption, which is the backbone of secure data transmission. Banks are safekeepers of investments, public assets, pensions, retirement accounts, and personally identifiable information and rely on public key encryption to maintain the security and privacy of this type of information. Should quantum computing allow encryption algorithms to be cracked, the impact could be significant. Even the threat of such bad actors using quantum computing can undermine public trust in commonly used encryption methods, creating problems for the institutions, including banks, responsible for securing data.
The US government has launched a multi-pronged strategy to address the risk, develop standards and ensure government agencies are prepared. While the federal banking agencies have not yet issued specific guidance, they can rely on existing regulatory and supervisory guidance and the ongoing research process.
What should banks do?
Quantum computing is not yet at the stage where it surpasses “classical” computing, although the ecosystem is developing rapidly. Some estimate quantum computing will become mainstream in 10 to 15 years, but recently we’ve seen claims that indicate the technology could be available much sooner than that. Despite the fact that quantum computing is not an imminent threat, there are several steps that banks should take to monitor developments in the technology and increase awareness of the risks:
- Begin to inventory computer- and data-intensive processes that can use quantum computers.
- Review current cyber security measures and consider developing plans to embrace “cryptographic agility” so that, if necessary, new encryption algorithms can be integrated into banking systems with limited disruption.
- Monitor National Institute of Standards and Technology and Cybersecurity and Infrastructure Security Agency efforts to develop the next generation of encryption algorithms and risk mitigation plans, respectively.
- Engage information security, vendor management and business continuity professionals to assess risks and coordinate internally.
- Reach out to core service providers and other key technology service providers to ask about their plans.