TORONTO (CP) - As the big banks revolutionize the way financial services are offered to Canadians, their little sisters the credit unions appear to be suffering from a sibling identity crisis.

Credit unions are clawing for a place in the new world of banking by turning to the past - their traditional role of offering personal, community-based financial services to customers who are also the co-operatives' owners.

Analysts are uncertain whether that's the right strategy, given that the much richer banks are in an e-commerce battle for the No.1 spot in online banking.

Some observers say a wave of mergers will squeeze out the mid-sized credit unions, while the smaller ones will survive by targeting niche markets that nobody else is interested in.

As proof of that trend, the Italian Canadian Savings and Credit Union announced recently it will open its doors next month to serve more than half a million people of Italian heritage in Central Ontario.

And earlier this month, B.C.'s Richmond Savings Credit Union said it plans to merge with Victoria-based Pacific Coast Savings Credit Union to form one of Canada's largest credit unions. It's the second major credit union merger recently in B.C.

Joseph D'Cruz, a professor of financial management at the University of Toronto, says the biggest problem facing credit unions is the "incredibly difficult" challenge of coping with electronic commerce and technology that is revolutionizing the delivery of financial services.

"There's a significant threat to their survival. If they don't find an appropriate way to respond to these changes, they'll disappear," said D'Cruz.

Unlike banks, Canada's 880 credit unions and 1,278 caisses populaires in Quebec are financial co-operatives owned, operated and directed by the people who use them. They're founded on principles of social and financial responsibility.

For that reason, they've grabbed branches in rural Canada this year from the Bank of Montreal, which has dumped its low-profit services in the small towns of British Columbia, Alberta, Saskatchewan and Manitoba.

"We were never set up as a profit machine," said Wayne Nygren, president of the Credit Union Central of British Columbia, the provincial umbrella group.

"The banks are moving out of the smaller communities because they can't generate sufficient profit on their capital. But we're not there to generate profit, we're there to provide a service to that community. Our objectives are totally different."

Nygren said the deals with the Bank of Montreal were a "win-win" for everyone because the credit unions employed the bank staff, doubled the number of customers and merged the branches with credit union locations, reducing operating costs.

"The bank got good publicity from it, got some value from their business and we got additional business at a reasonable price."

The alternative, said Nygren was for the Bank of Montreal to shut the 13 branches it sold in August, leaving behind disgruntled customers.

"The reason we're doing this is we're committed to rural Canada," he said. "We're committed to stay in those rural communities and it makes a lot of sense for us to increase our penetration in those communities and develop synergies."

The Bank of Montreal has sold to credit unions 34 branches in Alberta and Saskatchewan for $25 million and 14 in Manitoba for $11 million.

On the heels of those deals, Scotiabank signed a deal Friday to sell 43 mostly rural branches in Quebec to Laurentian Bank for $35 million.

"I think they're following a good lead," said Dean Kriekle, the senior Bank of Montreal vice-president responsible for branch consolidation. "I don't know what the other banks' strategies are, but I think if it makes sense for us it makes sense for others."

Branches were traditionally built to handle in-person transactions, said Kriekle, but with more and more 24-hour-a-day alternatives to banking - such as the phone, bank machines and even wireless devices - visits are declining by 15 per cent a year and fewer branches are needed, he said.

"That's a trend that's not slowing down. . . The nature of the business has changed. The banks have got too much bricks and mortar on too many corners. There's a need to consolidate."

Kriekle was reluctant to discuss the bank's strategy for rural branches in Central and Eastern Canada, but indicated "the same puzzle" would apply.

While he said the last thing the Bank of Montreal wants to do is shut down a branch outright and withdraw service from a small community, he fell short of promising that couldn't happen.

"I couldn't say there's no circumstances where we might close that branch because the world isn't that absolute."

David Bond, a business professor at the University of British Columbia and a former vice-president of Hongkong Bank of Canada, now called HSBC Canada, says "virtual" branches are the future, whether or not the public is ready.

In March, a group of nine credit unions in Ontario, Manitoba, B.C. and Nova Scotia filed a plan with the federal government to create a national "bank" with an initial $11 billion in assets.

But an earlier effort, led by Vancouver City Savings Credit Union of British Columbia, in partnership with 11 other credit unions, ended last July when VanCity pulled out of the plan to create a national, federally regulated co-operative.

VanCity, Canada's largest credit union, is a dominant player in B.C. with assets that grew by eight per cent to $6.4 billion last year. It also runs a virtual bank, called Citizens Bank of Canada, which serves clients across the country by telephone, banking machines and the Internet.

"You're going to see a few very large credit unions like VanCity, and a lot of little small ones that are run part-time - say in the local paper mill or something," said Bond. "And the middle-sized ones are going to get squeezed out."

But Bill Knight, chief executive of Credit Union Central of Canada, the national umbrella group, is adamant Bond is wrong.

"We've been listening to that nonsense for 50 years. All this doom and gloom," said Knight.

"We will not only survive, we will thrive because these other cats are trying to become more and more continental and international. As they refocus that way, we are still being very relevant in serving neighbourhoods and communities."