Managerial Finance

E-Finance II
Krishnan Dandapani
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Krishnan Dandapani , (2017)," E-Finance II ", Managerial Finance, Vol. 43 Iss 5 pp. -
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 E-Finance II

INTRODUCTION

We are at the threshold of the fourth technology-induced Industrial Revolution. The First

Internet Bank of Indiana was introduced in 1995. Since then, there has been an explosion of

Internet-related financial activity. Google CEO Eric Schmidt estimates that by 2020 everyone in

the world who is so inclined will be connected to inexpensive Internet as balloons, drones, and
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microsatellites provide access, and 50% of Internet accessors are projected to be networked

through mobile devices. The implications of these developments are enormous for electronic

finance. What has been the status of e-finance in the last two decades? What does the future hold

for e-finance?

In this brief review, we recognize the impact of the Digital Age on e-finance in five key areas:

• Payment systems

• Cloud computing in financial services

• Valuation metrics for multi-sided platforms

• Quantum trading

• Cyber security – costs, benefits, and protection

This review concludes by pointing out potential areas of advancement in the coming

decades and the possible evolution of newer e-finance models based on developments in artificial

intelligence (AI) and Internet of Things (IoT).

PAYMENT SYSTEMS: DIGITAL AND CRYPTOCURRENCIES

Digital currency is electronic money that serves as an alternative currency in digital or

online transactions. Accelerating e-commerce and global financial crises such as Cyprus (2013)
 and Greece (2014) have promoted the use of digital currencies as investors seek alternative

payment mechanisms. A major motivation for the evolution of digital currencies has been the

drive to enhance e-commerce productivity by reducing time and transaction costs in commerce.

Two types of digital currencies have evolved to address the need: cryptocurrencies and non-

cryptocurrencies. Cryptocurrencies are decentralized peer-to-peer digital currency based on

computer cryptography for security. Popular cryptocurrencies include Bitcoin, Lite Coin,

Zerocoin and Peercoin. Non-cryptocurrencies are backed by a promise to pay a set amount of

bullion and include e-cash, e-gold and e-bullion. While a lack of popular acceptance has been a
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major impediment to the growth of non-cryptocurrencies, network-based systems such as

Digicash, CyberCoin and Netcash have functioned as a proxy for money.

Bitcoin was created in 2008 and popularized by 2010. Its inventor described it as a new

electronic cash system that is fully peer-to-peer with no trusted third party (Nakamoto, 2008).

Bitcoin is generated through computer processing power using complex block algorithms when a

block is decrypted. Bitcoin is computation intensive, and the first step involves a prospective user

to create a “Bitcoin wallet,” which contains public-private keys. Bitcoins are held in an encrypted

format within a piece of downloadable software, or “electronic wallet.” Bitcoin is a distributed

cryptographic ledger shared against network users (Mark, 2014). Blockchain, a shared public

ledger, records the number of bitcoins possessed by each address with its long, unique number. A

lock called public key protects each address. To transfer bitcoins, the private key of the owner is

needed to unlock the public key. An open, distributed network of computers called miners

validates proof of transfer and ownership (Hagiu and Beach).

Competing currency Litecoin is a peer-to-peer Internet currency that enables instant near

zero cost payment to anyone in the world. Litecoin is secure and has wallet encryption. Peercoin

is the first scientific computing cryptocurrency. Considered the forerunner of cryptocurrencies, by

2013 Bitcoin’s valuation exceeded US $2 Billion, the only cryptocurrency to achieve such a high

valuation. As e-commerce increases in size, need for increased payment facility, faster transaction
 efficiency, and transaction cost reduction becomes paramount. Trusted third party payment

systems such as PayPal face stiff competition as there is a move to eliminate the third party.

However, volatility and valuation issues are mounting concerns for otherwise successful

cryptocurrencies, and as a result, acceptance of Bitcoin has suffered. While a few small and large

merchants in the world accept Bitcoin as a form of payment, universal acceptability has been

slow and distant. Bitcoin’s value between 2013 and early 2014 has fluctuated from “$13.40 to

$1,203.42, a ratio of 90 to 1” (Henwood, 2014). In addition, due to a lack of regulatory control,

fraudulent and criminal behavior using Bitcoin is significantly high. In March 2013, the United
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States Financial Industry Regulatory Authority (FINRA) issued an alert to investors listing six

relevant risks regarding digital currencies, including exchangeability, security, fraud, theft, lack

of safety to depositors, and irreversibility of transactions. The anonymity of Bitcoin transactions

has been both a blessing and a curse. While it provides anonymity and privacy to users, it has

been used in illegal activity, including drug dealing and money laundering (FINRA, 2014). The

use of Bitcoin in the black market for drugs, illegal goods, and fraud reinforces security as a huge

issue for digital markets and currencies necessitating control and regulation.

The successes of digital currencies, which lack centralized monetary authority and mostly

comprise anonymous users, have been difficult to regulate and control, causing national

governments to take varied approaches. Currently, Bitcoin is banned by some countries while

widely used by others. Government intervention in China, Bolivia, Ecuador, Thailand, and

regulatory impediments in the United States and Europe are continuing. For example, even

though the U.S. government does not recognize Bitcoin as legal tender, it does recognize it as an

economic activity and as deserving of attention (Ly 2014). In the United States, Bitcoin is not

subject to much government regulation, but the nature of Bitcoin along with its relative newness

and continuing development has made it difficult to determine regulation. As there is no

centralized issuer, these currencies are not tied to a particular government, and there is no
 banking system following similar regulation to guarantee Bitcoin deposits or to help monitor their

movements for regulators (Thomas 2013).

The 21 million Bitcoins to be mined stand testimony to the fact that digital currencies

could have a future if the volatility, security and operational risks can be successfully mitigated.

Future security concerns for digital currencies may evolve aside from all of the transactional risks,

including theft of digital wallets, distributed denial of service (DDoS) attacks, and hardware

malfunctions. To prevent future disorder, operational risks, such as two incompatible versions of

Bitcoin running simultaneously, and multiple purchases with the same Bitcoin units need
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attention. Furthermore, transactions that are not authorized in accordance with the rules set forth

by the public ledger could create chaos. Future currencies also must address the lack of market

depth and issues of conversion at a minimal cost using multiple exchanges. The tax-free

advantage of Bitcoin comes from the lack of an issuing government or any third party. Since

there is no third party, there is not a way to implement a taxation system. All transactions are

instant and finalized the moment Bitcoin is traded. Anonymity and speed are great advantages

when it comes to Bitcoin. However, these are also the greatest disadvantages as there are no

refunds when it comes to return of currency. This problem could become acute if Bitcoin were to

evolve into a vastly used currency, used by many businesses, companies and individuals. Lack of

buyer protection is a serious disadvantage of digital transactions.

Currently, Bitcoin is a payment system that is software oriented and performs all of its

functions online. The attraction of Bitcoin is not the currency itself but the platform of peer-to-

peer networking, or “blockchain.” The future of finance and ease of global exchange of currency

are successfully and easily being executed by diligently recording each transaction on a public

ledger. Blockchain-based applications, which adhere to a user’s privacy in every arena of the

platform, can be employed. An area of phenomenal success in the payments system however has

been blockchain technology and its file-sharing system, called bit-torrent networks. Wadwa

(2015) points out that blockchain is useful not only for finance. It is an almost incorruptible
 digital ledger capable of recording practically anything that can be digitized: birth and death

certificates, marriage licenses, deeds and titles of ownership, educational degrees, medical

records, contracts, and votes. It has the potential to transform the lives of billions of people who

lack bank accounts and access to legal and administrative infrastructure. Chanjaroen and

Darrenboey (2016) point out that fraud in the $4 trillion trade finance market is providing impetus

to banks to adopt blockchain technology and ledgers to account for trade finance. Standard

Chartered PLC, which recently lost almost $200 million from a fraud, has teamed up with DBS

Group Holdings Ltd. to develop an electronic ledger of invoices that uses a parallel platform to
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the blockchain employed in Bitcoin transactions. Lenders such as Bank of America Corporation

and HSBC Holdings plc are evaluating blockchain for trade finance and other banking

applications while Citigroup Inc. is exploring how blockchain technology can help in treasury and

trade.

CLOUD BANKING

Cloud computing is revolutionizing ecosystems in multiple industries, including financial

institutions. The base of cloud banking is a pay-per-use or subscription based service that extends

the capabilities of information technology in real time over the Internet. The principle behind this

is based on the optimization of supply chains that translates into higher efficiency and lower costs.

Though cloud computing originated in the 1950s, it expanded in the 1990s with the continued

development of the Internet. The development of Amazon’s elastic compute cloud in 2006

enabled small businesses and individuals to rent computers. In 2009, Google Apps enabled a leap

forward in the form of browser-based enterprise. Technology has rapidly changed the financial

services industry, and the future of banking is greatly influenced by mobile banking and payment

systems as well as evolving new technologies. The rapid growth and acceptance of digital wallets

such as Apple Pay, the Android Pay app, and others reinforce the disruptive technological
 revolution, which is challenging traditional banking models. Cloud computing is reshaping the

future of financial institutions.

Cloud computing is an Internet-based system where data is stored on virtual drives rather than

physical data drives, enabling easier sharing and access to information from different sources.

When data is stored in a cloud, fewer physical infrastructures are needed. The average reduction

in cost in 2015 for participating institutions was around 23% based on initial studies in the United

Kingdom and the United States. Ovum’s (2014) study of 200 banks shows that 60% of the banks

spent 20% to 39% of their budget on cloud applications.

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Cloud computing is advantageous to both users and service providers in terms of cost

savings and flexibility due to usage-based billing. An increase in flexibility leads to an increase in

capacity, which helps financial institutions shift their expenditures elsewhere instead of investing

in infrastructure, personnel education or software licensing. Service providers also can benefit

from business stability through the management of higher level data protection and back-ups.

Security fears are paramount when it comes to businesses switching to cloud banking. However,

there also have been numerous examples of businesses shifting to cloud services that show

stability, e ciency, cost effectiveness, and reduction of risks are achievable. The cloud also can

give firms the ability to respond quickly to changing markets as well as customer and

technological needs. Firms can constantly manipulate and rebalance technology to meet

requirements set by consumers. Speed over competitors and the ability to respond quickly will be

an important competitive edge in this development.

The ability of a financial institution to succeed in cloud banking is based on choosing the

correct service, deployment and operating models. Typical cloud architecture includes private

clouds, public clouds, and hybrid clouds. Cloud computing is divided into three basic levels:

infrastructure layer, platform layer, and application layer. This architecture integrates hardware

and software resources in the cloud and then offers cloud services to users. Four different service

models have evolved; these are Business process-as-service (BpaaS); Software-as-a-service

 (SaaS); Platform-as-a-service (PaaS); and Infrastructure-as-a-service (IaaS). A majority of

institutions eliminate a large sum of operational costs associated with maintaining their own

infrastructure, which requires constant update of software or hardware. Once outsourced,

institutions can dedicate time and focus to their core business and, thus, avoid issues pertaining to

hardware, software and communications infrastructure as well as general viability. More

importantly, higher rates of success and profitability may be achieved, as institutions are able to

focus on their primary business. One of the cloud’s key efficiencies lies in its ability to do

extraordinary analytical work using big data. Nowadays, companies use a variety of applications
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in the cloud, such as customer relationship management (CRM) applications, enterprise resource

planning (ERP), accounting, and even business applications. These cloud-based applications can

be operational in a few days, which was impossible with traditional enterprise software. Another

key efficiency of the cloud is its ability to do stupendous analytical work. While most large firms

have the resources and funds to compute and compile large amounts of data that they can employ

for certain purposes, a large number of medium to small-sized firms do not have this ability.

Generally, a large portion of this data is normally scattered throughout an organization, resulting

in difficulties in seamless integration and in drawing conclusions from the data to continue to do

research and draw even deeper conclusions. Hence, cloud banking could level the playing field

for small and medium-sized financial institutions.

The remarkable thing about using the cloud platform is that it allows a firm or institution

to store every bit of data desired, such as daily transactions or confidential information pertaining

to clients. Cloud banking in general can help financial institutions with analytical models,

forecasting, record keeping, and constant updating of sensitive information related to the business.

Cloud banking also allows for the use of real time data, increasing competitiveness, and dynamic

response time at a very low cost. Good examples of areas in which the cloud can help are the

development portfolio risk budgets and in forecasting future trends of demand for certain

securities or other assets.

 However, several risks potentially could keep cloud banking from becoming a prominent

option for firms and institutions. Some of the major disadvantages include security and privacy,

quality of services, increased vulnerability, and cost effectiveness. A common data incident can

cost an average of $750,000 to the bank, and attacks do not seem to diminish regardless of the

increase in banking security. In fact, studies show cyber-attacks in 2014 increased a whopping

48% from the previous year.

Information security is the largest concern for customers and institutions. Privacy risk is

another major concern for customers. The way providers address these risks is validation of how
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much they believe using the cloud platform truly is the future. One of the major risks

accompanied with using the cloud is the chance of a data breach within an institutions

infrastructure. Service providers are under constant scrutiny, going through background checks,

certifications, and external monitoring. Encryption also plays an important role when providers

are protecting the data entrusted to them. Select security procedures are practiced to maintain an

environment where data intrusion will not be possible. Disadvantages such as security and

privacy, quality of services, increased vulnerability, and cost effectiveness as well as other factors

could impede development. Unfortunately, recent incidents of data loss and password leakage do

not help in building trust among security conscious users. A key statistic serving to escalate

concern is the fact that 88% of attacks against the financial sector last year succeeded within one

day.

Cost-saving benefits disappear as demand for cloud service grows. Due to the assertion

that cloud services are cheaper than on premise data management, many companies have started

joining cloud services to minimize costs. Banks will need to flow with the tide of the Digital Age

by integrating their services before their market share is taken away. Automated services will be

the norm instead of large human capital; financial technology startups will challenge the

traditional products development process, thus prompting industry gains. Automation will replace

typical, repetitive banking tasks. Automation will allow functions necessary for repetitive tasks,
 such as services consisting of repetitive data transactions, to be complete faster and more cost

effectively. Cloud banking offers some hope, and it will be interesting to see what transpires in

the years to come as technology changes and grows. This is a pivotal time in banking where the

industry could grow in customer experience and convenience, or it could revert and become

stagnant due to the threats.

The future of cloud computing is in banking competition, collaboration and convergence.

The major motivation of banks migrating toward cloud technology is because they can serve their
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clients much quicker as cloud-based competitors keep up the pressure. Cloud computing also

allows a higher responsiveness to shifting market conditions due to outstanding technology

flexibility, and we can expect cloud banking to steadily progress. In the future, traditional banks

may struggle to maintain their dominant positions in a very different and evolving landscape as

consumer behavior shifts with technology. Three disruptive forces in the form of technological

innovations, demographics and evolving new business models could make traditional banking

obsolete. The behavioral disruption if not addressed could create an opening for niche non-

banking institutions to take over. The challenges of keeping the data secure through encryption

and obstacles such as vendor lock-in due to compatibility with cloud platforms provide additional

obstacles to overcome. Flexible database environments, analytics-ready and integrated systems of

big data need to be constructed for better operation. As McAfee (2011) points out, the cloud

makes all institutions more productive and facilitates collaboration, and institutions can use data

mining to get valuable insights from data, which is useful for business intelligence and data

analytics. Successfully enabling the widespread adoption of cloud computing could add €250

billion to the European GDP by 2020 thanks to greater innovation and productivity, according to

research conducted by International Data Corporation. Potentially four million new jobs could be

created as a result. Additionally, Cloud banking could address areas where transaction banking
 has been short, such as cash management, trade and supply chain finance, payments, mobile

banking, and business analytics.

Two major technologies changed today’s banking system: The Internet and mobile devices. The

evolution of these have led to widespread adoption of cloud computing. While cloud computing

is still an emerging market, it has moved beyond early adopter toward the early majority market

(BDO Corporation). While cloud banking is in the early development stage, to be successful, the

major challenges of security and compliance, reliability, cloud management, interoperability, and

regulation must be addressed.

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VALUATION MODELS AND E-BUSINESS MULTISIDED PLATFORM (MSP)

With the humongous growth and popularity of the Internet in transactions, some of the

largest and fastest growing business areas are the multisided platforms of the past decade.

Multisided platform (MSP) is a business model pattern that brings two or more groups of

customers together. MSPs can be a technology service or product that creates value by enabling

direct interactions between two or more groups and facilitates interactions between the different

groups. Such platforms are of value to one group only if the other group of customers is also

present. Successful MSPs bring huge value by reducing search and transaction costs for

participants by linking participants in an efficient and convenient way to interact. One of the

important features of MSPs is that the value of customers on one side of a platform increases with

the increasing number of participating customers on another side due to “cross-side network

effect” (Haigu).

However, MSP firms have proven to be a double-edged sword. MSPs can create higher

barriers to entry for competing firms due to heavy investment in technology and upgrading of

infrastructure, which explains why successful MSPs rank high in their respective industries.

Examples of MSP abound in the new economy. Prominent firms include Amazon, which

connects buyers and sellers; Facebook, which connects users; third party game developers and
 affliated third party sites; and Uber, which connects professional drivers and passengers. Uber

changes the traditional business model of hiring a taxi and is cost effective and more convenient.

LinkedIn has three-sided platforms, which connect individual professionals, recruiters, and

advertisers. Google and Baidu operation systems are platforms for advertisers, searchers and

askers. American Express and PayPal are platforms for merchants and consumers. Major

efficiencies of multisided platforms include lower search costs, speedy comparisons, lower prices,

enhanced customer services, and reduced participant barriers.

According to McKinsey estimates, "The Internet accounts for 3.4 percent of overall GDP
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in 13 nations studied and for certain countries as much as 10% of the GDP over the period 1995-

2009. The Wall Street Journal has been tracking MSP private companies valued over a $1 billion

and documents an increase in the number of companies from 43 in 2014 to 131 in 2015 (Austin,

Canipe, and Slobin, 2015). These companies are also known as “unicorns.” Unicorns have been

experiencing exponential growth during the last six years. The number of companies reaching a

value of $1 billion or higher, the threshold to be considered a unicorn, has increased from four in

2009 to 131 in 2015, accomplishing an implied total value of $468 billion. “Decacorn,”

companies with valuations of $10 billion or more, is also increasing. The top 10 unicorn

companies classified are Uber, Xiaomi, Airbnb, Palantir, Snapchat, Didi Kuadi, Flipkart, SpaceX,

Pinterest, and Dropbox.

NON-STANDARD VALUATION METHODS – NEW VALUATION METRICS

Many so-called unicorn companies, due to their fictitious but dream-like valuations, have

received stratospheric valuations due to venture capital firms’ willingness to pay for future

profits. These Internet companies are difficult to value using traditional metrics, such as the

standard Gordon (1959) model for traditional stocks or Damodaran (2006) valuation techniques

for Internet stocks, as they have little earnings or guarantee of earnings in the near future.
 Professor Damodaran describes in his blog: “Some Unicorns are based on rationality and some on

the prevalence of a bubble due to lack of traditional financial metrics. These MSP firms, due to

competitive pressures are forced to choose between growth and profitability and can be very

profitable only in the long run. How does one value these Unicorns? While all valuation has

certain subjective judgement factors such as the discount rate, trends, probability and estimation

of growth can all skew the resultant pricing (Goodwin, 2015). Using the popular scorecard

method, which considers factors such as strength of management team and its products as

subjective, even though it may be more qualitative than quantitative. Each variable could be
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assigned a weight. Without reliable quantitative metrics, investors combine multiple methods to

reach reasonable valuations that take into account both hard and soft factors. The lack of

standardization creates a black hole of mystery surrounding the valuation process, with arbitrarily

different valuations offered by different investors.

However, perhaps the most popular model to value E-Business stock currently is the

Power Law Model. The formula for the Power Law Model is the Market Value of the Leading

Company in the Industry divided by the rank of the target company raised to the power of the

industry (CB Insights, 2015). The key to using this formula would be to determine the correct

industry power. While this may be a rough approximation valuation attempt for investors

considering the billions of dollars necessary for it to work, certainly it is prudent to consider other

metrics for valuation methods. New world metrics include users, user growth, the reputation of

the founder, brand reputation, public feedback, and excitement around the company and product

as well as the number of followers. These metrics are far more subjective but still measurable as

opposed to quantitative and hard numbers. Under a Venture Capitalist Valuation Method, after-

tax earnings and the desired return on investment is considered (Morgan).

The relevance of users and user growth can be paramount as exemplified by companies

such as Zillow and Twitter, in which stock price reacted strongly to news that user counts had

increased or decreased. The unicorn minimizes the relevance of hard financial statements, and
 markets react to soft figures that overlook or even ignore the traditional metrics of hard profits

and cash flow.

Some valuation metrics are also evolving based on the business model of the MSP. In a

Borrow and Build model, where a company attempts to capture as many customer users as

possible by utilizing all of its resources, the relevant metrics would be cost of acquisition per user,

revenue potential per user, percent of active users, and cost of switching for users. Under a

Freemium model, companies induce a customer to begin using their product with the confidence

that pleasant customer experiences will lead to upgrades to paid and more advanced services.
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Here, the company would have to consider cost of acquisition of free and paid users, cost to serve

free and paid users, and the strength of network effects as consumers spread word via word-of-

mouth and social media outlets. A platform company creates stickiness for its users. This is

especially important because the firm has built a critical mass utilizing users, developers of apps

and more. This company would have to focus on matching value capture with value creation. It

would do so through the metrics focused on cost incurred per transaction, cost of acquisition per

user, costs of conversion, cost to serve individual users, percent of users engaged in transactions,

and focusing on lifetime value of accounts. Issues affecting recent valuations include Multi-share

class structures, a lack of liquid market for private shares, director compensation, rapid change

and competition, and excessive liquidity forcing players to search for better returns. To begin

using valuation metrics outside of the traditional methods investors have been using for decades

requires a great leap of faith. Even if the new metrics work in the short-term, long-term

sustainability is a problem. While these valuations do not matter in private placement markets, as

these companies move to the public arena the valuation inconsistencies could lead to dismal

returns.
 QUANTUM TRADING – SPEED OF LIGHT
The Internet has impacted securities trading immensely. We are entering a new era

beyond algorithm, high frequency, and computerized trading of securities. Quantum security

trading is evolving rapidly. Quantum computing is based on theoretical computation systems that

make use of quantum mechanics events such as superposition and entanglement to perform

operations. In contrast to digital computers that require data to be encoded into binary digits (“bits”

in the form of 0 or 1), “quantum transistors” use quantum bits (qubits), which can be superposed

and processed simultaneously. Therefore, the computing capacity is increased exponentially.

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Following Moore’s projections, computers have been doubling the processing power every two

years making the processors smaller every time, and the current transistors inside computers are

reaching the size of an atom. For faster processing, a paradigm shift is necessary, and quantum

computing is expected to fill that need. One qubit quantum processor could process four times the

amount of information through the superposition principle and an infinite amount of operations

through the entanglement principle. Furthermore, the computing power relationship is not linear;

instead, it increases exponentially (Nippon Telegraph and Telephone, 2014). Although, currently

there are no quantum computers on the market, they could cause a revolution in trading and

analysis. Quantum trading is being developed to implement a scientific approach to trading.

When implemented, the next convergence for securities trading would be trading at the speed of

light. Quantum computers are still under development, and many companies are developing

quantum processors. In 2013, Google and NASA participated in D-wave X2 computing systems,

and initial estimates are that the D-wave new processor is 100 million times faster than a regular

computer chip. While companies around the globe are spending millions of dollars advancing

computers that will shave off small fractions of a second of interval, D-wave systems could

potentially be exponential, and these super computers will process information at much higher

speeds and have the ability to simultaneously handle more combinations of data than traditional

computers. For example, in 2003, a trade was made in 25 milliseconds, and 2,400 trades were
 conducted per minute. In 2013, a trade was made in 400 microseconds, and 150,000 trades were

conducted in a minute. With the potential entry of Quantum computing and trading, it is

estimated that by 2020 it will be possible to perform 4.5 million trades within a minute. Current

statistics show that high frequency trades initiate 70 % of daily trades. While high frequency

trading firms in the United States are only 2% of the 20,000 firms, they account for

approximately three fourths of all trades made in the United States. This has considerably

shortened the holding period time for securities estimated to be only 22 seconds. As Quantum

computing systems have the ability to perform calculations exponentially, the response and
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computation time is expected to be 600 times faster. According to IBM, Quantum computers

promise to open up new capabilities in the field of optimization and simulation simply not

possible using today’s computers. If a Quantum computer could be built with just 50 qubits, no

combination of today’s super computers could successfully outperform it (Bridgewater, 2015).

While a few years away from perfection and implementation, Quantum trading could implement

a scientific approach to trading and streamline every portion of trading methodology by seamless

and frictionless design. By deciphering every move, traders can assign and define specific

execution prices for each portion of trading, such as entry, profit-target, stop-loss, and exit. The

advantage is receiving information and calculating under Quantum electronic systems is quicker

than the competitors, thus creating a big advantage for Quantum traders, who will make higher

profit at the expense of others. Traders who have traditional platforms will see their expected

future profits reduced and may find that their trading strategies have become obsolete and

unprofitable. Quantum computing and trading are irrevocably going to alter the landscape of

financial markets and security trading in the decade to come.

The implementation of Quantum trading will revolutionize securities trading by

increasing computational power and by changing the way information would be analyzed,

processed, distributed, and regulated. Currently, Quantum computing is projected to be a decade

or more away from a true working adoption by most financial and banking institutions. While
 Quantum computer systems have found early academic success and financial backing, some

academics are still skeptical. Notable academic and MIT professor, Dr. Scott Aaronson believes

that the early Quantum computing models do not enter into superposition and state of

entanglement. In addition, the chips do not provide Quantum speed-up compared to conventional

computers, and Aaronson concludes that there is an enormous gap between science and the

product (Miller 2013). This may take years to resolve. When these impediments are overcome,

Quantum based technical stock market analysis could be the early entrant to Wall Street as

Goldman Sachs is a big investor in Quantum computing. However, the changes over the next few
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years, at least initially, will be incremental as the imperfections in the system are resolved by beta

testing and enormous investments are made by institutions to upgrade the system. Many of the

negative consequences from Quantum computing include changes in labor structure in the

financial world, high costs, security and privacy issues, regulation issues, and market inequalities.

CYBER SECURITY
Cyber-attacks are on the rise, and they affect millions of people worldwide. Do the risks

to our digital economy outweigh the benefits? Zurich and the Atlantic Council explored four

possible scenarios and discovered a startling USD $120 trillion gap between the best and worst

outcome for the global economy, which could cost the world US$120 trillion by 2030. While the

globalization of value chains has increased financial integration, it has also significantly enhanced

the vulnerability to external shocks. With risks mounting and traditional control weakening, the

risks of interconnectedness outweigh the benefits. Disturbingly, the report argues that annual cost

of managing cyber risks could begin to outweigh the annual economic benefits globally by 2019

(Zurich Insurance, 2015).

A recent study documents that 60% of executives worldwide faced cyber risks in their

business and in financial institutions more than 53% face real cyber security concerns on a daily

basis. Cybercrime has morphed from stealing passwords to banking, as hackers find new ways
 and techniques such as phishing, water holing, ransomware, and scanning. While some of these

attacks are random, the most damaging attacks are targeted attacks, where attackers focus on a

specific firm spending months to plan and focus on the vulnerabilities of the firm. For

multinational firms, the problem is acute as attackers subvert the supply chain by compromising

software or equipment where the firm is most exposed and cyber defense is low. Numerous

businesses have been widely affected by recent cyber-attacks. At Target, corporation attackers

installed a malware on the company’s network and stole credit information for more than 40

million customers and emails of 70 million customers. In 2014, hackers breached JP Morgan
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Chase’s computer network, stealing gigabytes of data and compromising sensitive account

information of approximately 83 million households and small businesses (Granville, 2015).

By 2014, banks such as Wells Fargo had increased their cyber security spending to

around $250 million dollars, while Citigroup spent around $ 300 million (Haung, Glazer, &

Yadron, 2014). Apart from cyber security defense expenses, damages that are caused by the

attack to potential customers also escalate cost. Corporations must begin to keep up-to-date with

cyber threats and excel in detecting and counterattacking cybercrimes. Unless these threats and

risks are identified and prevented, corporations are doomed to pay millions in damages.

Cyber threat is defined as the threats and risks that come from firms’ activity online,

trading on the Internet, the use of electronic systems such as credit cards and ATM cards,

networks of technology as well as storage of personal data in computers or computer networks.

The threats can be divided into broader categories such as loss caused due to cybercrime, the

actual loss of systems that contain confidential information, the loss organization’s data and

online activities on social media and e-mails (Deloitte, 2013). Cybercrime is also a big threat to

the growth of an economy. There is a possibility that the functionality of the benefits of the

Internet may come into question.

This digital disintegration will therefore be harmful to the economies of governments and

to businesses as well. Numerous organizations in varied fields and industries have suffered loss
 due to cyber-attacks. The loss has been financial as well as in physical liabilities. Examples of

such organizations include Adobe, NATO, Living Social, the University of Maryland, eBay,

Neiman Marcus, Michael Stores and Target (Snow, 2011).

The motives of cybercrime that happen in a financial institution may be varied. Cyber

criminals, who are sometimes disgruntled and unsatisfied employees, may commit crimes against

financial institutions for malicious reasons such as to damage the brand name or reputation of the

organization. The information on aspects such as intellectual property or any other sensitive

information may be stolen to cripple the business operations of an organization. To effectively

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manage cyber risks, security aspects of institutions should be examined and eventually split into

several areas. The security aspects of the financial institution. Without such security measures,

cyber-attacks will continue to be rampant in the business world.

Cyber-insurance is used for protection against Internet-based risks that can originate

from e-Commerce, business websites, and credit card processing or online payments.

Technology, the Internet, and social media revolutions have brought about vast changes

in the business environment in previous decades. One of the key industry drives is the percentage

of business services conducted online, which is expected to grow at an annual rate of 4% through

2020. This makes the importance of the cyber insurance world even direr to defending businesses,

customers, and their reputations. Cloud computing and online payment systems such as Apple

Pay are becoming increasingly more common as well. These new business models are

increasingly under risk of breach. Cyber-attacks can come from several sources. Cyber security

can be breached by a growing number of potential parties, including internal employees,

disgruntled customers, rogue hackers, competitors, and global activist groups; hence, cyber

insurance is needed in today’s globalized online business world. Currently, the majority of

business insurance policies do not provide protection against cyber-attacks.

Sensitivity to cyber threats, cyber insurance and coverage vary. Like other forms of

insurance, cyber insurance comes in a variety of packages with differing premiums. Notable
 companies including Travelers Inc., AIG and Hartford offer cyber insurance. Types of packages

include First-Party Insurance Agreements and cover such things as the material costs of a breach

including forensic analysis, fees to determine the nature and extent of the breach as well as

notification costs that are legally mandated. Liability Insurance Agreements cover costs

associated with the liability of a claim or suit related to a breach and include (travelers.com).

Cybersecurity insurance is designed to diminish losses from a variety of cyber incidents,

including data breaches, business interruption, and network damage. According to industry

estimates, the costliest cybercrimes are those caused by denial of service, malicious insiders and
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web-based attacks with an average cost to participating companies of just over $1 million. The

following titles are some of the specialized cyber insurances available: Loss/Corruption of Data,

Business Interruption, Liability, D&O/Management Liability, Cyber Extortion, Crisis

Management, Criminal Rewards, Data Breach, Identity Theft, Social Media/Networking, and

Cloud Computing. One in three companies in the U.S. now carry insurance to protect against

losses resulting from data breaches. Small businesses, particularly technology companies,

financial institutions, and retailers are the principal and fastest growing markets for cyber

insurance policies.

Nevertheless, multinational firms face a huge problem because coverage issues can

appear with their worldwide cyber insurance policy since some countries around the world bar

this type of coverage. For example, Europe’s insurance regulations at first glance indicate that a

master global insurance program written in the United States would be perfectly acceptable.

Nonetheless, there are some problems making those global programs comply with local insurance

regulations across the continent; therefore, risk managers sometimes prefer to purchase a local

cyber policy in every country where the company does business (Zurich, 2014).

Despite an increase in the market for cyber insurance in Europe, there are still gaps. In

the UK, only nine insurers have specialized cyber-insurance offerings compared to 30 40 in the

United States. Latin America is considered somewhat behind the curve on cyber-preparedness.
 Currently, regulations and cyber laws have been adopted in Argentina, Brazil, Colombia, Mexico,

and Peru, and risk managers are becoming increasingly aware of the high risk of privacy breaches

and cyber-attacks, realizing the necessity of cyber liability insurance. Despite being introduced

only recently and still in its initial phase, cyber insurance is growing exponentially. Presently,

insurers are providing a full cyber robust protection for security and privacy liability, event and

crisis management, network interruption, and cyber extortion (Mercado, 2013).

Firms have been increasingly turning to cyber risk insurance to manage cyber threats better. But

firms must take a proactive stance toward managing cyberattacks, not only for their well-being
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but also to enhance over all cybersecurity and help secure critical national infrastructure

(Shackelford, 2012).

CONCLUSION
Looking back, e-finance has transformed all activities of finance in the last two decades.

Looking forward, two concurrent developments will shape it in the decades to come: AI and IoT.

The AI market is estimated to grow from US $418.7 million in 2014 to US $5.05 billion at a

cumulative average growth rate of 53.65% by 2020 (Markets and Markets). AI is significantly

changing the world and workplace. AI has profound impact on Wall Street trading through

automated trading systems. AI enables traders to program special algorithms to trade when

specified trading conditions are met. The impact on finance jobs are a big concern as robotic

advisors become commonplace and affect finance professions and all types of carriers (Markets

and Markets). IoT is defined as a way for devices that are connected to the Internet to

communicate and share information with other “smart” devices in real time. Analysts and

technology providers forecast added economic value from IoT to be anywhere from US $300

billion to US $15 trillion by decade’s end (Eckenrode, 2015). Members of the financial services

industry will most likely be active participants in this transformation, and IoT will have
 significant implications for banking, capital markets, insurance, wealth management, and

commercial real estate in the forthcoming decade.

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