Preparing for a quantum future: what’s next for quantum computing in financial services?
Many leading innovators in the financial services industry are tapping into the powerful potential of quantum computing, with the technology offering numerous opportunities for major advancements.
Quantum has the potential to revolutionise financial services
Here, FinTech Futures delves into the ins and outs of the fast-approaching quantum future, examining the operational benefits, the potential risks the tech poses, and how regulators are waiting in hot anticipation with a host of advanced safeguards.
Not like the others
There is little doubt of quantum’s complexity. While the technology shares some mutual traits with its predecessors, there are a range of innovations that can be enabled by quantum computing that will ultimately set it apart from everything that came before.
The classic method of computation forms the basis of the most prevalent computer models used today. In these models, all information is reducible to the value of either zero or one, known as bits. These bits are processed through AND and Not AND (NAND) logic gates, which act on one or two bits at a time.
This method enables current computers with N bits to exist in one of two, to the power of N, possible states at a time, comprising all zeros, all ones, or a combination of the two. In essence, this reduces a world rich with information to binary representation.
Despite the efficiency of this approach, for computer scientist John Duigenan, who currently serves as general manager of global financial services at IBM, “this is not how nature, or the universe, represents information”.
Quantum harnesses qubits (quantum bits) over ordinary bits to model and represent information.
“The power of a quantum model of computation lies in its richer repertoire of states,” Duigenan tells FinTech Futures.
“So yes, it has ones and zeros. But quantum computing qubits can represent a one, a zero, or a combination of both, which is a property known as superposition.
“A quantum computer takes account of exponentially many logical states at once. That’s very powerful and no classic computer can achieve it.”
Duigenan predicts that when quantum computers become generally available, they’ll likely boast 100,000 qubits, which will enable the financial industry to solve problems that are either impossible to solve today, or at a faster speed than ever before. A problem or calculation that may take 100 years for classical computers to solve may take days or even hours using a quantum computer.
At present, the industry harnesses simulation to predict and model future outcomes that inform decision making about future behaviour, such as in investments, portfolios, future prices, risks, stress testing and fraud.
While many firms use conventional, grid-style computing techniques to action this simulation, Duigenan views this approach as “somewhat limited” as it processes information “in a very rigid way”.
“Quantum computers will do all of those risks, and simulation and modelling exercises, but faster and with much more complex data structures. Quantum computers release us from that limitation, allowing us to process, model and simulate data in entirely new ways.”
Two together
Quantum will most likely be applied across industries in tandem with other innovations, especially artificial intelligence, as Duigenan goes on to explain.
He pinpoints the increasing popularity of AI tools for modelling and simulation in financial services, but identifies how the current rate of production remains largely dependent on vast compute resources and millions of graphics processing units (GPUs).
“A quantum computer can do that process way more efficiently,” Duigenan explains. “This should both optimise and simplify, and potentially reduce, the energy cost associated with building generative models.”
For Duigenan, quantum’s operational potential must remain interoperable in order to truly connect with the mainstream.
“Nobody truly believes that a quantum computer will replace classical or conventional computers,” he states. “When thinking about this, hybrid becomes very important because quantum computers and conventional computers need to co-exist.
“They must be able to connect with each other and share data, and will potentially sit in different places. Data needs to move safely and securely between those locations, which is very much part of a hybrid approach and the models that we build.
“When we bring quantum computers into the mainstream as released products beyond current research and development efforts, which are really bearing fruits, the synergy between hybrid, quantum and generative AI will be incredibly powerful.”
Quantum focus areas
IBM, which delivered its first quantum computer in 2016 and is a leading provider of quantum computing capabilities, has played host to a number of initiatives aimed at increasing the industry’s use of and confidence with quantum.
Aside from opening Europe’s first IBM Quantum Data Centre in Ehningen, Germany, in October, the company also hosts the collaborative IBM Quantum Network, through which more than 250 firms and over 600,000 registered users are given access to IBM’s open-source quantum toolkit Qiskit.
Some big names actively involved in the network include Truist Bank, Wells Fargo and HSBC. HSBC recently trialled post-quantum cryptography (PQC) in the buying and selling of tokenised physical gold in September.
HSBC became the first international bank to offer tokenised physical gold to institutional investors when it launched its bond tokenisation platform HSBC Orion in 2023, and in its latest pilot with Quantinuum tested the interoperability of these tokens with PQC algorithms.
Speaking with FinTech Futures, Philip Intallura, global head of quantum technologies at HSBC, says the bank is currently testing the waters of operational quantum with different types of quantum models.
He says the bank’s proposed application of quantum currently has three core focus areas, the first of which being operational enhancement.
Intallura confirms that portfolio, policy and class optimisation are all currently under the magnifying glass, with plans to enhance “many things across the bank”.
The second peak of HSBC’s exploration with quantum is financial simulation initiatives, which are models used across banking for risk modelling and stress testing.
“That’s an area where quantum may be able to demonstrate an enhancement over the models that we run today,” he says.
Echoing the sentiments made by Duigenan, Intallura states that HSBC is also exploring quantum machine learning as its third point of focus.
“There are many types of models across the bank where we apply machine learning models,” he comments. “And one area that we’re looking at is around fraud detection.”
Intallura explains the benefits of utilising quantum for fraud detection: “It’s fewer losses out of the bank, because you’re becoming better at detecting fraud. And it’s fewer false positives, because you’re detecting the precision at which things are accurate and are genuine transactions.
“It’s looking specifically at the characteristics of a transaction and seeing whether we can enhance the existing machine learning capabilities we have today with quantum methods.”
A number of firms are already preparing for a quantum future
One of the first cases HSBC looked at with IBM involved a reduced “toy” scale model able to be consumed by an IBM quantum computer.
Since then, the bank has progressed its efforts in this area with the use of tensor networks, which effectively compress bulky quantum algorithms within legacy technology stacks.
“Gate-based quantum computing isn’t mature enough yet to use in production. So we look at ways that we might be able to compress quantum algorithms on specialised classical tech stacks to do things in the near term as well.”
Elsewhere across its preparations for a quantum future, HSBC stands as a notable participant of the Monetary Authority of Singapore’s current pilot of quantum key distribution (QKD) solutions.
Other participants include DBS Bank, the Oversea-Chinese Banking Corporation (OCBC), United Overseas Bank (UOB), Singapore-based telecommunications provider SPTel and SpeQtral, which specialises in quantum communication technologies.
Their work together will include the creation of a proof-of-concept sandbox to evaluate the “viability, effectiveness and applicability” of QKD to financial services, according to a statement delivered in August, and determine the “feasibility of using QKD for quantum-safe communications within the financial sector”.
‘Unprecedented speed’
Also joining hands with the MAS is Banque de France. The partnership announced last month is seeking to sign and encrypt emails using a mix of current and PQC algorithms.
A spokesperson from Banque de France tells FinTech Futures that the central bank “recognises quantum computing potential to revolutionise finance”.
“By leveraging quantum principles like superposition and entanglement, such a technology promises unprecedented speed and capability in solving complex problems beyond classical systems.”
Key applications across Banque de France now include “combinatorial optimisation”, “machine learning acceleration”, “differential equation solutions”, and “cryptanalysis and cybersecurity”, which address cryptographic protocols and cybersecurity frameworks.
In its latest study, Banque de France used 127-qubit quantum systems to test “a small sample of transactions to improve cash and securities movements”.
However, the central bank tells FinTech Futures that its hopes for a quantum future are “constrained by current technology”, with quantum computing facing “significant challenges”.
These include technical hurdles like stable qubits and system interoperability, as well as high investment needs and talent shortages.
“BdF remains committed to exploring quantum computing, balancing innovation with careful risk management, to enhance the resilience, efficiency, and security of the financial sector,” a spokesperson for the central bank continues.
The central bank’s efforts are setting a precedent across the industry worldwide, and are similar in shape to those currently underway at Italian international banking group Intesa Sanpaolo.
‘A game changer’
Intesa Sanpaolo has been engaged in a major technology overhaul with IBM since March last year, when it adopted the IBM z16 platform to protect sensitive data from quantum attacks that could potentially decrypt today’s standard security protocols.
Speaking to FinTech Futures, Davide Corbelletto, a quantum specialist at Intesa Sanpaolo, says the financial services industry’s potential application for quantum falls into four main categories.
Optimisation and collateral management fill the first corner, for which quantum computers are “are extremely efficient and fast in finding candidate solutions that, if not the best, are quite close to being the best”.
The next corner, for Corbelletto, goes to stochastic simulation, with applications notable across derivative pricing, stress test scenario generation, value-at-risk estimation and expected shortfall evaluation.
He cites quantum’s ability to generate true random numbers as “a game changer” in this department, as “the accuracy of estimation techniques essentially lies on that randomness”.
There’s little surprise that machine learning dominates the third corner for Intesa Sanpaolo. Corbelletto says quantum could “revolutionise tasks like credit scoring and fraud detection” when paired with machine learning technology.
“Basically, every financial algorithm has one or more machine learning models as an input pre-processing layer and an output post-processing layer,” he explains.
“These models, especially during the training stage, require a lot of classical computational resources which probably won’t be sustainable in the long term.
“More powerful quantum hardware could possibly be a smarter and more eco-friendly answer to these demanding needs.”
Corbelletto adds that the fourth corner of quantum application is cybersecurity. “Quantum computing is also a potential threat for the most widely adopted public-key encryption protocols, which are also used to protect financial transactions,” he comments.
For every step the industry takes towards quantum, it gets one tick closer to Q-Day.
As previously stated by Dave Wallace of Dave and Dharm Demystify – citing Sergio Gago, managing director of AI and quantum computing at Moody’s: “Q-Day is the anticipated moment when quantum computers become powerful enough to break the cryptographic systems that currently secure our digital communications and transactions.”
Corbelletto adds: “It’s mandatory to study both quantum and classical countermeasures to mitigate the risk this technology will pose.”
Time’s a-ticking
AI’s dive into the mainstream has triggered a wave of smarter, more sophisticated fraud techniques, prompting banks to spend hundreds of billions worldwide to keep themselves protected.
But as quantum computing continues to surge forward, the real storm is perhaps yet to come.
With unmatched processing power, quantum could unravel encryption and uproot the very foundations of security in ways not yet imaged.
“Having the conversation” is a critical first stepping stone for quantum-proofing a bank, according to Intallura.
“This is probably the most important step for any organisation when it comes to preparing for quantum risks, because this is still quite nascent and niche, and isn’t widely discussed or understood.
“Having said that, over the last nine months, I’ve seen a significant boost in terms of awareness and things being discussed.
“We’ve certainly had conversations at the group, at the executive committee level, at the board level, and we have various emerging risk forums throughout the group.”
And he says that while the threat posed by quantum computers remains “very significant”, the good news is that “we are still some years away from a quantum computer with a capacity to be able to do this”.
“Very robust solutions are being developed that will protect against this threat. The less good news is that it’s going to take large organisations probably around a decade, at least, to undertake the transformation to quantum safe.”
Like Intallura, Banque de France’s spokesperson picks up on the rising prevalence of the ‘store now, decrypt later’ attack, whereby criminals save their most unbreakable data for the most powerful machines; an upwards trend which “underlines the need for proactive measures”.
Banque de France has been working on a number of quantum computing trials
The central bank has been addressing these challenges through its own preparations since 2022, when it first implemented an IPSec VPN tunnel solution using PQC algorithms.
This implementation, its spokesperson explains, focused specifically on the hybridisation of both classic and new algorithms, crypto and algorithm agility, and the impact of these solutions on existing internal systems.
It later joined hands with the Central Bank of Germany – Deutsche Bundesbank – the following year to set up a quantum-safe communication channel as part of project LEAP, run by the Bank for International Settlements (BIS).
As previously mentioned, it most recently cooperated with the MAS last month to demonstrate the use of quantum-resistant algorithms, CRYSTALS-Dilithium and CRYSTALS-Kyber, in the exchange of encrypted communications.
For Intesa Sanpaolo, Corbelletto explains how, through its Competence Centre, the bank is currently collaborating with the National Centre for Research in Big Data, HPC and Quantum Computing in Italy to “establish guidelines for the gradual and consistent adoption of quantum technologies, ensuring alignment with industry advancements”.
“These collaborations aim to extend the concept of security beyond the banking sector, fostering a safer and more resilient ecosystem for all.”
The regulatory response
As one of the most heavily regulated industry’s in the world, financial services’ steady intake of quantum is being closely monitored by regulators around the world.
With its potential to disrupt banks’ longstanding security networks, quantum is prompting a heightened level of vigilance among regulatory bodies.
In publishing its views on the PQC transition, the French Cybersecurity Agency (ANSSI) predicted that risks from quantum will begin to materialise by 2030.
NIST, of the US Department of Commerce, remains a steadfast force in attempting to standardise the industry’s cautious approach to quantum.
In August, the federal agency published its final three encryption algorithms for PQC and digital signatures, designed specifically to defend against attacks produced by a quantum computer.
These include the Module-Lattice-Based Key-Encapsulation Mechanism Standard, the Module-Lattice-Based Digital Signature Standard, and the Stateless Hash-Based Digital Signature Standard, and are derived from the NIST PQC Standardisation Project, which first commenced in 2016.
“These finalised standards include instructions for incorporating them into products and encryption systems,” comments NIST mathematician Dustin Moody, who heads the PQC standardisation project.
“We encourage system administrators to start integrating them into their systems immediately, because full integration will take time.”
While the industry remains a few years away from a fully quantum future, Moody’s comments cement the fact that the urgency to prepare is undeniable.
Financial institutions must act now if they are to stay ahead of the quantum curve, as the next decade will no doubt prove critical in shaping a quantum-proof financial landscape.
The time to prepare is now, as those who fail to do so may find themselves vulnerable in the face of this transformative technology.
