As 2025 nears, financial institutions must adopt standalone IT systems to navigate increasing regulatory scrutiny and technological advancements. A strategic IT carve-out blueprint is essential for resilience, compliance, and competitive advantage. This involves creating microservices for agility and conducting thorough AI Technology Due Diligence to mitigate risks. Effective cloud governance is crucial for compliance and security. Institutions must also address data sovereignty challenges and enhance operational resilience to adapt to evolving regulations and market dynamics.
Financial institutions face a dual challenge: escalating regulatory scrutiny and relentless technological advancement. For banks, insurers, and investment firms, incremental adjustments are no longer sufficient. A strategic IT carve-out blueprint, centred on establishing standalone systems, has become essential.
This is more than just a technical separation; it is about building resilience, ensuring continuous compliance, and gaining a competitive edge amidst evolving market dynamics. These dynamics include not only heightened cyber threats and shifting data privacy regulations, but also the increasing influence of AI Technology Due Diligence in financial services.
The Strategic Imperative of IT Carve-Outs
Creating standalone IT systems is now a strategic necessity for financial services, not merely an option. The Financial Conduct Authority (FCA) underscores this imperative in its strategy, emphasising technology and innovation as crucial for broader financial inclusion and sector robustness [1].
This regulatory focus compels institutions to reassess their IT infrastructure. From March 2025, the operational resilience rules, alongside the Consumer Duty standards for fair value and vulnerability assessments, mandate that systems meet specific compliance needs without disrupting essential services.
This juncture presents both challenges and opportunities for firms to leverage IT carve-out strategies that can nimbly adapt to evolving demands. This blueprint provides financial services firms with actionable strategies to navigate complex carve-outs while ensuring compliance, operational continuity, and competitive advantage.
Navigating Regulatory Demands Through System Separation
The regulatory landscape for financial services firms is becoming increasingly intricate. From ESG reporting under the Corporate Sustainability Reporting Directive (CSRD), effective January 2025, to emerging AI governance frameworks and closer scrutiny of motor finance commissions [2], legacy, monolithic IT systems are struggling to keep pace.
Institutions should consider segregating compliance-focused functionalities into standalone systems. These systems can be independently updated, monitored, and audited, facilitating superior management of compliance risks while maintaining operational continuity.
For smaller firms, these regulations can seem particularly burdensome. However, by strategically carving out specific IT functions, even resource-constrained businesses can develop focused, manageable systems. These targeted systems address complex requirements without necessitating a complete infrastructure overhaul.
This approach ensures efficient resource and expertise allocation, making compliance achievable without prohibitive costs.
Microservices: Architecting for Agility
Microservices offer an optimal foundation for effective IT carve-outs. This architectural style involves decomposing large systems into smaller, independent services [3]. For financial institutions, this translates to separating functions such as payment processing, compliance checks, or customer authentication into standalone services.
These services can be independently developed, tested, and deployed, significantly mitigating risks associated with system modifications. Updating a single service does not necessitate changes to the entire system.
For firms undertaking AI Technology Due Diligence, microservices provide enhanced visibility into system components, simplifying the assessment of risks and opportunities within specific areas.
While microservices might initially appear complex for smaller businesses, initiating a separation with core functions that benefit most can yield substantial gains in agility without undue complexity. Open-source containerisation tools like Docker and Kubernetes can further reduce costs and streamline deployment, making microservices accessible even on limited budgets.
Key advantages of microservices for financial institutions include:
- Independent service deployment, minimising system-wide risk during updates.
- Enhanced scalability for specific functions based on demand.
- Improved fault isolation, preventing cascading failures.
- Greater flexibility in technology selection for individual services.
- Simplified compliance management through function-specific controls.
Consider the Canadian Imperial Bank of Commerce (CIBC), which adopted microservices to decompose monolithic backends. By developing an in-house microservices framework, they achieved accelerated development cycles and significant reuse opportunities, positioning themselves for future volatility.
Similarly, a global investment bank partnered with Endava to modernise their front-office application using microservices and cloud migration, enhancing efficiency, reliability, and scalability. These examples demonstrate the tangible benefits of microservices in enhancing agility and resilience.
AI Technology Due Diligence: Ensuring Carve-Out Success
Rigorous AI Technology Due Diligence is paramount for successful IT carve-outs, especially given that 96% of banks are integrating AI across fintech, insurtech, and wealthtech [4]. Financial institutions must meticulously evaluate AI components within their systems.
This entails understanding AI interactions with other systems, data prerequisites, and adherence to explainability and bias control mandates in standalone configurations. The FCA’s emphasis on algorithmic explainability and bias in credit decisions [5] underscores the necessity for robust, auditable governance.
By conducting thorough AI Technology Due Diligence, firms ensure that carved-out systems leverage AI effectively while mitigating associated risks. For smaller businesses, AI due diligence need not be prohibitively expensive.
Concentrating on fundamental aspects—such as data privacy, bias detection, and explainability—provides a pragmatic approach. Employing cost-effective explainability tools like LIME (Local Interpretable Model-agnostic Explanations) and SHAP (SHapley Additive exPlanations) can streamline this process for smaller entities.
Focus on bias audits, diverse datasets, and transparency practices to ensure responsible AI implementation.
“The FCA’s focus on algorithmic explainability and bias in credit algorithms underscores the necessity for robust, auditable governance frameworks in AI implementations.” [5]
Key Considerations:
- AI due diligence is crucial for regulatory compliance in carved-out systems.
- SMEs can adopt focused, budget-conscious approaches to AI assessment.
- Explainability and bias mitigation are critical factors for financial services AI.
- Effective due diligence ensures AI enhances, rather than compromises, standalone systems.
"Cyber risks are becoming increasingly sophisticated... So, increasingly creative solutions must be found to address cyber risks." - Loretta J. Mester
Cloud Governance: Securing Standalone Systems
Robust cloud governance is essential for financial institutions utilising cloud-based standalone IT systems. As they increasingly adopt AI and automated tools for compliance with regulations like PCI DSS and GDPR [6], effective governance models are vital.
These models must guarantee compliance, security, and operational efficiency within cloud environments. When establishing standalone systems, banks and insurers must govern cloud resources effectively to maintain compliance and adhere to internal policies.
AI can proactively monitor cloud environments for security vulnerabilities, compliance gaps, and inefficiencies. For financial services firms, cloud governance is not optional—it’s a fundamental component of successful IT carve-outs.
It ensures standalone systems are secure, compliant, and cost-effective while leveraging cloud agility. For smaller businesses, affordable cloud governance solutions are available. Utilising cloud services with integrated governance features and prioritising essential security measures can provide adequate oversight without substantial investments in specialised tools.
Strategic governance models are crucial for managing regulations like PCI DSS and GDPR, balancing compliance with efficient operations through automation and AI [6]. Frameworks like the Cloud Security Alliance (CSA) Cloud Controls Matrix (CCM) and the NIST Cybersecurity Framework offer robust guidance [Internal Research].
Best practices include data encryption, strict access management using multi-factor authentication (MFA), continuous monitoring, and regular security audits.
To bolster cybersecurity within carved-out IT systems, particularly for SMEs with budget constraints, several effective strategies can be implemented:
- Multi-factor authentication (MFA) adds a critical security layer by requiring multiple verification steps, significantly reducing unauthorised access [13]
- Regular cybersecurity training for employees is also vital, equipping them to identify and avoid threats like phishing and ransomware
- CyberCatch Holdings recently launched a cybersecurity awareness training solution tailored for small to mid-size businesses, addressing this critical need [14]
- Cyber insurance offers financial protection against cyber incidents, aiding SME recovery from potential attacks
- Leveraging AI and blockchain technologies can enhance fraud prevention through real-time monitoring and data analytics [15]
- Maintaining updated systems and performing regular backups are fundamental practices for vulnerability protection and data recovery [16]
- Consolidating security tools into a unified platform can streamline operations and improve threat management [17]
Agentic AI, combining large language models with specific tools, is poised to transform cybersecurity, urging proactive preparation [23].
Data Sovereignty and Localisation: Navigating Jurisdictional Requirements
Data sovereignty and localisation regulations present unique challenges for financial institutions undertaking IT carve-outs. The trend towards on-premises cloud solutions, notably in India’s BFSI sector due to cyber concerns and data localisation laws [7], underscores the increasing importance of data sovereignty.
As nations implement stricter data localisation mandates, financial institutions must design IT carve-outs to ensure data residency within geographical borders. This may necessitate region-specific standalone systems that operate autonomously yet integrate with global platforms when required.
For banks and insurers operating across multiple jurisdictions, system design and data governance become significantly more complex. Addressing data sovereignty early in the planning phase is crucial to avert costly compliance issues and operational disruptions.
For smaller businesses with international operations, understanding data regulations in each jurisdiction is vital. Region-specific standalone systems might seem daunting, but employing modular design and cloud services with regional data centres can offer scalable solutions.
This approach assists smaller businesses in managing data sovereignty without having to establish separate infrastructures for each region. Best practices for data migration include:
- Adopting advanced technologies like AI for anomaly detection
- Proactive security measures
- Robust data backup strategies adhering to the 3-2-1 rule
- Rigorous data quality checks to maintain historical record integrity
"Operational resilience is vital, as it is a mechanism for building muscle memory to address disruption to the most important services FIs provide." - Duncan Scott
Operational Resilience: Fortifying Against Disruptions
Operational resilience is now a regulatory and business imperative for financial institutions, with new requirements commencing in March 2025 [8]. Strategic IT separation via carve-outs directly enhances resilience.
By segregating key functions into standalone systems, institutions can better contain potential failures and implement focused resilience measures. This methodology enables detailed impact assessments, improved testing, and defined recovery times for distinct business functions.
For financial services firms conducting AI Technology Due Diligence, operational resilience must be a core component of assessments, ensuring AI strengthens, rather than weakens, system stability.
The operational resilience needs of UK financial institutions are shaped by evolving regulations, economic pressures, and technological advancements. The Prudential Regulation Authority (PRA) has proposed increasing the deposit protection under the Financial Services Compensation Scheme (FSCS) to £110,000 from £85,000, effective December 1, 2025 [9].
This aims to bolster consumer confidence by providing enhanced protection in the event of financial firm failures, accounting for inflation and supporting economic stability. Concurrently, the UK economy faces pressures from rising National Insurance and inflation, increasing vulnerability for smaller businesses [10].
This economic climate underscores the need for robust operational resilience to manage market fluctuations. Technological advancements, particularly AI and cloud, demand faster, more cost-effective services, necessitating IT transformations that enhance resilience to address new risks and opportunities [11].
Global events also impact financial services, requiring risk strategies to sustain profitability and revenue [12]. Given these factors, strategic IT separation is crucial for enhancing operational resilience, enabling institutions to adapt to regulatory changes, economic pressures, technological advancements, and global risks, ensuring stability and sustained growth.
Ukraine’s National Bank (NBU) recently demonstrated exceptional resilience by maintaining its System of Electronic Payments (SEP) throughout ongoing conflicts, prioritising cashless payments and establishing a “power banking” network to ensure service continuity even during blackouts.
This highlights the critical importance of resilient IT infrastructure in maintaining financial stability during crises. To minimise employee resistance during IT carve-outs, financial institutions should:
- Embrace digital transformation and AI integration
- Develop comprehensive IT transformation plans
- Foster a culture of diversity and inclusion
- Implement fair conduct programmes
These strategies facilitate smoother transitions and enhance employee buy-in.
To minimise expenses during IT carve-outs while ensuring effective system separation, SMEs in financial services can adopt several strategies:
- Leveraging digital solutions helps stabilise financial operations and manage costs efficiently [19]
- Creative cost-cutting measures, such as flexible working arrangements and recruitment freezes, can also be applied to IT carve-outs [20]
- Modernising financial operations by eliminating manual processes and outdated systems reduces time and resource expenditure [21]
- Engaging IT service providers offering smaller, agile contracts allows for faster execution and cost optimisation [22]
Understanding typical costs and implementing these strategic measures enables SMEs to navigate IT carve-outs more effectively, ensuring both cost efficiency and successful system separation.
To further minimise learning curves for employees adapting to new standalone IT systems post-carve-out, financial institutions should consider hybrid training models combining in-house expertise with industry consultants [24]. Skills bootcamps offer intensive, short-term programs focused on specific skills required for new systems, proving effective for rapid upskilling [25].
Financial institutions should track key performance indicators (KPIs) to measure the success and ROI of IT carve-outs beyond operational resilience. These include:
- IT cost savings
- Project delivery time
- Revenue increase
- Customer satisfaction scores (CSAT)
- System uptime
- Regulatory compliance
- Employee productivity metrics
Regularly monitoring these KPIs ensures alignment with strategic objectives and demonstrates the tangible value of carve-out initiatives.
Diligize: Your Strategic Partner for IT Carve-Outs
IT carve-outs in financial services demand specialised expertise and a deep understanding of the sector’s unique challenges. Diligize empowers private equity firms and their portfolio companies with expert technology advisory, ensuring informed decisions, mitigated risks, and enhanced operations.
Our detailed assessments uncover hidden risks and align technology strategies with your investment objectives. Diligize combines cost-effectiveness with unmatched expertise, delivering exceptional value in every engagement.
In a recent IT carve-out for a global financial services company, BCG Platinion highlighted the importance of comprehensive assessment, prioritisation, and robust program management, which Diligize mirrors in its approach.
Strategic IT separation through carve-outs, leveraging microservices, prioritising AI Technology Due Diligence, and establishing robust cloud governance, enables financial institutions to build standalone systems that meet regulatory demands and drive innovation and growth amidst the technological shifts of 2025.
For SMEs seeking RegTech solutions to maintain continuous compliance within carved-out systems, advancements in AI, cloud governance, and blockchain offer significant aid. Contact Diligize to discover how we can assist you in creating a robust carve-out IT blueprint tailored to your specific needs.
By employing strategic IT separation through carve-outs, financial institutions can enhance resilience, segregate critical functions, and establish backup systems for effective disaster recovery. Prioritising microservices, conducting thorough AI Technology Due Diligence, and implementing strong cloud governance are essential steps.
How prepared is your financial institution to leverage strategic IT separation for competitive advantage in the rapidly evolving regulatory landscape of 2025?
Contact Diligize today for a complimentary initial assessment of your carve-out readiness. Our experts will provide you with a personalised report highlighting key opportunities and potential challenges specific to your organisation’s needs.
Our Opinion
At Diligize, we understand that strategic IT carve-outs are no longer a discretionary measure for financial institutions; they are a foundational necessity in today’s dynamic regulatory and technological environment. The intensifying pressures for operational resilience and unwavering compliance, combined with the transformative power of technologies like AI, compel a proactive and resolute approach to system separation. Incremental adjustments are simply insufficient. A meticulously planned and expertly executed carve-out strategy is paramount for constructing robust, agile, and inherently compliant IT infrastructures, capable of navigating future uncertainties with confidence.
For financial institutions of all sizes, the efficacy of IT carve-outs hinges on several indispensable components. These include rigorous AI technology due diligence to effectively mitigate risks and ensure regulatory alignment, robust cloud governance to safeguard standalone systems, and a strategically phased implementation that carefully addresses data sovereignty and operational resilience. Diligize, with our profound expertise in technology advisory for private equity and their portfolio companies, is uniquely positioned to guide organisations through this intricate process. We deliver the essential insights and strategic direction needed to ensure that carve-outs not only achieve compliance and resilience but also cultivate a tangible and enduring competitive advantage.
Author
Steve Denby, based in London, UK, is a Senior Partner and an entrepreneur, technologist, consultant, public speaker, and leader with 28 years of experience in managed IT services. Specialising in private equity-backed businesses and rapid-growth organisations, Steve has deep expertise in mergers and acquisitions (M&A), supported by his studies at Imperial College Business School. He focuses on minimising risk and creating value through technology in privately invested companies growing by acquisition.
References
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