The UK’s finance sector is a huge part of its economy. Over the coming weeks, the potential applications of quantum technology and quantum computing to this vital industry will be investigated. This article gives a brief overview of the current landscape of the UK’s finance sector and the growing financial technology (fintech) industry.
Table of Contents
The Importance of the UK Finance Sector
The UK economy is dominated by the services sector, which produces 77% of the nation’s total GVA, with financial services accounting for 8%, or £126.9bn, of this. Financial Services in the UK employ 1.1m workers, 3.4% of the total workforce. The UK had a trade surplus in finance totalling £78.9bn in 2013, more than all other net exporting industries in the UK combined. This is a huge offset in the nation’s trade in goods and services deficit, which totaled £72.4bn in 2013. The banking industry alone contributed £65.6bn in taxes for the 2013/14 tax year, 12% of the total collected that year.
UK FinTech
According to the Ernst & Young report “Landscaping UK Fintech” published in 2014, UK FinTech generates £20bn in revenue annually. This revenue was split into the following “microsectors”:
Payments – £10bn: This covers infrastructure and technology for payments, from online services like PayPal to physical card readers. The online side has seen a huge number of new players in recent years, bringing with them new technologies and business models
Financial Data and Analytics – £3.8bn: This microsector has two primary functions: analyse the data collected by financial services on individuals and corporates for purposes such as credit reference and insurance, and to analyse markets for trading.
Financial Software – £4.2bn: This part of the sector deals with the software used by financial services. It is dominated by large, established companies.
Platforms – £2.0bn: This includes platforms of Bitcoin trading Software, peer-to-peer transactions, personal wealth management, and aggregators.
The UK Chief Scientific Advisor identified four key areas of technological development for UK fintech in the FinTech Futures report:
Machine learning and cognitive computing
Digital currencies and blockchain technology
Big data analytics, optimisation, and fusion
Distributed systems, mobile payments, and peer-to-peer applications
The report recommends that the Research Councils and Innovate UK support all areas of fintech, highlighting big data and analytics.
Identified Priority Areas
Payments
Big Data, Analytics, and Modelling
Security
These have been identified by considering their economic importance and the initial assessment of the applicability of quantum technology.
Payments
22 billion transactions totalling £75 trillion were carried out via payment systems in the UK in 2014, according to the newly set-up Payment Systems Regulator. The sector itself generates £10bn in revenue, half of the total for UK fintech. Many of the biggest new finance start-ups are involved in the payments sector; two of the nine startups identified by Business Insider as “the most likely to be worth $1bn next” are specifically payment systems, with a further three being involved in peer-to-peer payments or lending.
The obvious way in which payments companies would be interested in quantum computing and technology is through security: companies want the best and most efficient security methods available; if QT can fill that space, there will be demand for it. Less obvious but potentially as impactful is big data.
An example of this comes from Apple Pay, Apple’s new payment platform, which will launch soon in the UK. Not only will the app itself collect huge amounts of data from its customers, but Apple has also demanded data from retail banks in return for use of their platform. This scale of data collection appears to be indicative of the growing trends in the payments industry.
Big Data, Analytics, and Modelling
Big data impacts the finance sector on both the commercial and investment sides. On the commercial side, the applications of big data are much like that of other types of business: understanding consumers.
On the investment side, big data and market analysis are used in algorithmic trading (including high-frequency trading). Investors are always looking for faster and smarter ways to analyze markets. As the IMAS review points out, technology for trading makes up a large part of the UK fintech sector. HFT is in decline: in 2012 the Bank of England found that it accounted for 27% of total trading volume on the London Stock Exchange down from over 40% in 2006 as profits have dropped. This could in some part be due to technological constraints; however, it is more likely due to stricter regulation and markets adapting to the new way of trading. Algorithmic trading is still big business, however, and remains a large part of stock trading.
Another part of analytics and modelling in finance is risk management. While this term covers a wide range of topics even within finance, one aspect which often appears is the need to model complex systems with many variables, and analyse large amounts of data.
Security
Security is a ubiquitous issue in finance, from the stock market to online banking to P2P transactions. Any advances made in either encryption or decryption can potentially be a huge deal across the financial sector. The Telegraph reported earlier this year that “banking bosses say a cyber attack is among their biggest fears” following a report from PWC regarding information security breaches in the financial sector. A 2014 PWC survey found that 38% of financial service firms plan to increase spending on cybersecurity over the next year.
However, only 8% of banks have made the same plans. The financial sector as a whole does not seem willing to invest money into improved security, despite 79% of finance chief executives claiming to be “concerned or very concerned” with cybersecurity threats. This indicates that keeping the costs of new technology low is of huge importance. Organizations may be unwilling to invest in and adopt new and future technology until it is either cheap or necessary.
Initial Assessment of QT Applications
The two key areas of QT which would most greatly impact the finance industry are quantum computing and quantum cryptography. These areas are strongly interconnected, linked by quantum networking and communication.
Computing
It is clear that quantum computers, even when “fully” developed, will be extremely good at handling only a small number of specific problems. Fortunately, those problems include things like searching for huge unsorted databases by mean of Grover’s algorithm, which have applications for big data and market analysis. They also appear to be good at machine learning, something highlighted by D-Wave CEO Vern Brownell as an aspect of potential applications in finance.
Cryptography
Quantum Cryptography has already demonstrated a number of ‘provably secure’ methods of data transmission. Quantum Key Distribution (QKD) is one of the more developed fields of quantum technology and computing and has already seen real-world testing in the form of bank transfers, the transmission of election results, and secure TV conferencing, amongst other applications. There are potential applications for such encryption and networking methods across all of the finance for securing data and transactions in both the commercial and investment sectors.
Quantum Clocks
The two technology aspects affecting high-frequency trading, other than the computing itself, are latency and clock accuracy. Highly accurate quantum clocks are often cited as an application of quantum technology to finance, specifically high-frequency trading. However, the development of more accurate clocks may not be beneficial to the industry for the foreseeable future. While two quantum clocks produced by NIST may agree to 17 decimal places, researches there not believe it is possible to synchronize clocks across Europe even to within a nanosecond, as was demanded by the European Securities and Markets Authority. More immediately important is the ability to transmit information across large distances quickly, reliably and securely.
Conclusion
For such a large and technology-driven industry, innovation is essential. Quantum technology, which has demonstrated potential and capability in security and big data analytics, should find a wealth of applications in the finance industry. The UK, as a world leader in both quantum research and finance, is in a prime position to bring the two together.
Author Bio:
My name is Manish Sharma. I am a digital marketing analyst & content writer. I am managing digital content to build a relationship for different IT & financial companies. Die-hard passionate about the profession and believe in simple living high thinking.
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