WISE - Women in STEM and Economics

Introduction

Quantum computing is an emerging field that applies the principles of quantum mechanics to solve complex problems that might take a classical computer many hundreds of years to solve — in just a few hours, or even minutes. Quantum computing technology applies quantum mechanics principles to perform many calculations simultaneously. Quantum mechanics is the field of physics that studies how matter and energy behave at the atomic and subatomic level.

Fields that could gain significant advantages from quantum computers range from chemistry to finance. These benefits stem from the ability of these computers to process data using mathematical techniques that can discover patterns which classical algorithms would struggle to identify. Nowadays, most of the research is focused on developing algorithms and applications, in addition to building the new technology itself. Quantum computing is estimated by IBM to become a USD 1.3 trillion industry by 2035, driven by investments from institutions like IBM, Amazon, Microsoft and Google.

Quantum Computing Fundamentals

Quantum computing uses quantum particles, called qubits, instead of traditional binary circuits. It operates by applying the quantum principles of superposition and entanglement. Qubits in superposition can exist in multiple states simultaneously, but when measured, they randomly show only one possible outcome. Entanglement links qubits so that the state of one is correlated with another, meaning that measuring one provides information about the other.

During a quantum computation, qubits are first prepared in superposition, then a sequence of operations — a quantum circuit — entangles these qubits and applies interference. Interference is the process that amplifies the probability of correct outcomes and cancels out incorrect ones. Finally, the most accurate results are isolated from all the possibilities.

A common way to explain this is through the example of solving a maze. A traditional computer would go through every possible path, one by one, until it finds the exit. A quantum computer, instead, can represent all possible paths simultaneously, generating a bird's-eye view of the maze by using qubits in superposition. Through entanglement, the qubits exchange information about these paths, and with interference, the wrong paths are cancelled out while the correct one is amplified, highlighting the most probable path to the exit.

Quantum computing holds substantial potential for the financial sector, offering new ways to solve problems that are too complex for classical computers. The McKinsey report How Quantum Computing Could Change Financial Services (2020) outlines that financial institutions that can harness the technology will be able to process and analyse complex and unstructured data more efficiently than traditional computers. The most impactful applications are in capital markets, risk management, portfolio optimization and encryption.

Applications in the Financial Sector

As quantum computers can process and analyse enormous amounts of data in parallel, allowing them to explore many potential solutions at once, quantum computing is expected to revolutionize the financial services landscape within the next few years. The emerging quantum technologies are already proving to be effective especially when applied to financial problems dealing with uncertainty and constrained optimization. Quantum computing's specific use cases for financial services can be classified into three main categories: targeting and prediction, trading optimization, and risk profiling.

Financial customers demand personalized products that are able to anticipate their evolving needs and behaviours. If financial institutions are not able to prioritize customer experience they might lose a significant share of customers. Quantum computers offer the possibility to create analytical models that scan behavioural data rapidly enough to identify which products are needed by which customers in almost real-time. The same approach can be used in estimating the probability of default of a bank. Moreover, an estimated 10 to 40 billion USD are lost in revenue by financial institutions due to fraud and poor data management systems, which could be improved by quantum computers' advanced capabilities in finding patterns and making predictions.

Trading markets' complexity has been increasing exponentially, and investment vehicles have changed. Quantum computing's combinatorial optimization potential may enable investment managers to improve portfolio diversification, rebalance investments to respond accurately to market conditions and investor goals. This new technology could also help perform a wider range of stress tests in liquidity management, derivatives pricing and risk measurement calculations. Monte Carlo simulations are currently the most used technique to assess the impact of risk in financial models by using random sampling, but this approach is limited by the scaling of the estimation error, which quantum computing would help reduce.

The rise of the quantum era gives financial services institutions the chance to exploit an advanced technology of great business value. Moreover, firms that act as first movers and adapt early during the current transition can seize a major competitive advantage and outpace rivals. McKinsey estimates that by the time a fault-tolerant quantum computer is available, the use cases in finance could create $622 billion in value.

Investment Trends

As of now, the investment volume in quantum technology has increased by 50% from 2023 to 2024, jumping from $1.3 billion to $2 billion. Most of the money has been directed toward start-ups, both emerging and mature, which reflects the interest in funding early to maximise returns or in mitigating risk by supporting more stable companies.

In 2024, two-thirds of the funding came from the private sector, but interestingly, public funding rose by 19% between 2023 and 2024, reaching 34%. By the end of 2024, governments had committed to fund quantum technology for $1.8 billion in 2025 — an amount that has been surpassed, reaching $10 billion by April 2025. The principal actors are Japan, UK, Germany, and the USA, with Japan accounting for nearly 75% of public investment announcements in early 2025.

Most quantum technology investments are directed toward quantum computing at 80%, and projections show that the market value of this area could reach $72 billion by 2035. An important driver of this trend is the number of partnerships between start-ups and tech giants like Amazon, Google, and Microsoft, which can accelerate the growth of performance and scalability.

Conclusion

In conclusion, quantum computing marks a fundamental technological breakthrough in a wide range of fields, including the financial sector, as it is a tool of unprecedented precision and analytical power. Through the application of the principles of superposition and entanglement, quantum computers can sift through complex datasets and solve optimization problems far beyond the reach of classical computers. As the technology continues to innovate, its applications in the financial sector will be of increasing importance and will redefine how financial institutions operate and compete. Even if a fault-tolerant quantum computer is yet to be available, firms that invest early and adapt quickly will benefit by gaining a major competitive edge and are set up to acquire a position as market leaders.

Bibliography

IBM Institute for Business Value. (n.d.). Exploring quantum computing use cases for financial services. https://www.ibm.com/thought-leadership/institute-business-value/en-us/report/exploring-quantum-financial

MIT xPRO. (2024, January 23). Ask an MIT Professor: The potential of quantum computing in finance. The Curve. https://curve.mit.edu/ask-mit-professor-potential-quantum-computing-finance

Stackpole, B. (2024, January 11). Quantum computing: What leaders need to know now. MIT Sloan Ideas Made to Matter. http://mitsloan.mit.edu/ideas-made-to-matter/quantum-computing-what-leaders-need-to-know-now

Gschwendtner, M., Morgan, N., & Soller, H. (2023, October 23). Quantum technology use cases as fuel for value in finance. McKinsey & Company. https://www.mckinsey.com/capabilities/tech-and-ai/our-insights/tech-forward/quantum-technology-use-cases-as-fuel-for-value-in-finance

Schneider, J., & Smalley, I. (n.d.). What is quantum computing? IBM Think. https://www.ibm.com/think/topics/quantum-computing

Gschwendtner, M., & Soller, H. (2023, March 15). Is winter coming? Quantum computing's trajectory in the years ahead. McKinsey & Company. https://www.mckinsey.com/capabilities/tech-and-ai/our-insights/tech-forward/is-winter-coming-quantum-computings-trajectory-in-the-years-ahead

Bogobowicz, M., et al. (2024, April 24). Steady progress in approaching the quantum advantage. McKinsey & Company. https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/our%20insights/how%20quantum%20computing%20could%20change%20financial%20services/how-quantum-computing-could-change-financial-services.pdf