Fifty years ago, 25 neighbors in Vancouver, British Columbia, scraped together 22 Canadian dollars to create an association to serve their financial interests.

Some were small-business owners who had to belong to an "employer group" to qualify for health insurance. Others were women who in those days could not get bank credit without a husband's or father's signature.

From these modest beginnings grew Canada's largest credit union, with 225,000 members and a reputation as a technology trailblazer. In that tradition, Vancouver City Savings Credit Union has announced it is establishing Canada's first "virtual," or branchless, bank.

"We will essentially become the electronic banking arm for VanCity, and we hope it will become the electronic banking arm for the entire credit union system across Canada," said Linda C. Crompton, a VanCity vice president who will be president and chief executive officer of the electronic subsidiary, Citizens Bank.

The announcement of Citizens Bank - which will serve customers almost exclusively by telephone, computer, and cable television - was a fresh sally in the battle between Canada's upstart credit unions and its dominant nationwide commercial banks.

The banks condescendingly view the credit unions as a blip on the country's financial radar screen. The credit unions proudly present themselves as a neighborly alternative to the banks that they describe as arrogant and profiteering. One credit union - not VanCity - ridicules banks in its advertising. (See page 10A.)

Credit unions have caught on, particularly in western Canada, where resentment runs deepest against the Big Five commercial banks, which are Toronto-based. The credit unions' "good guy" portrayal plays well to the pioneer legacy of British Columbia, Alberta, and the other western provinces.

The banks are well aware of the credit unions' strategy and admit it strikes a popular chord.

"In Canada, bank-bashing is a national sport, like hockey," says Joseph A. Barbera, senior manager of media relations at Bank of Montreal. The credit unions, he said, "carve out a very strong niche in the West."

Dwarfed in asset size by the nationwide banking monoliths - each would rank in the United States' top 12 - VanCity prides itself on nimbleness and technological innovation. CEO Robert D. Quart said his was the first financial institution in Canada to compound interest daily on savings accounts, to offer banking by personal computer and interactive cable television, to establish in-store branches, and to deploy debit cards and stored-value cards.

It was also, he said, the first to offer a set of "ethical" investment funds that judge companies by the way they treat their employees and the environment. The Ethical Funds Inc. family of seven funds has accumulated $650 million of assets.

With Citizens Bank, which aims to open its virtual doors in January, VanCity hopes to break new ground in more ways than one. "I will be the first Canadian female bank president," Ms. Crompton said.

VanCity's subsidiary, like some similar ventures in the United States, will be loosely modeled on First Direct Bank in Leeds, England, a Midland Bank offshoot that gained renown as that country's first telephone- only bank. In their research and developement period, VanCity executives visited First Direct as well as Premier Direct in Dublin (which focuses on remote insurance sales) and Girobank in London (which is part virtual, part physical).

Citizens Bank plans an idiosyncratic twist on virtual banking, emphasizing the television and PC.

"The first thing that struck me about First Direct is that they were at that time not doing anything electronically - their entire business was through the call center," said Richard Wafer, vice president of information systems at VanCity.

"I expected they would at least have PC home banking and touch tone," he said. "It surprised me that they had been so successful without using any technology approaches and that they didn't have any intention to change."

VanCity's early experiment in banking by television has gotten it a place on the agendas of conferences worldwide. U.S. community bankers have been particularly intrigued by the potential of that delivery channel.

But the two-year-old offering has been less well received among VanCity members, who strongly prefer using the institution's proprietary home banking software on personal computers. The television product requires users to own a CD-ROM reader or rent one from the credit union, requiring an audience not on the technological cutting edge to go to a higher level of sophistication.

"We haven't been very successful in getting the TV across," Mr. Wafer said. "We've tended to market to people who aren't very technologically aware. The big box - that's a negative in people's mind. They just don't need another black box or cable in their room."

On the plus side, Mr. Wafer noted that a new generation of Internet- equipped televisions is coming to market. "We've got to keep in there with all these different access methodologies," he said. "That's the philosophy behind the credit union and behind the new bank, too."

Mr. Quart, the 35-year-old CEO, said 10% of members use television for banking, a percentage that hasn't changed much for more than a year. "We're not giving up on TV," he said. "We want to have a product that's working there, and when the solution becomes more simple, we'll be there."

Remote banking in Canada has evolved more slowly than in the United States. The major banks were later in installing call centers (behind VanCity's, which opened in 1985) and in embracing the Internet. Home banking by computer is still a novelty.

Bank of Montreal, one of the Big Five, recently tried to preempt its competitors. It launched a virtual banking service Oct. 16 called Mbanx, a freestanding operation to serve customers in Canada, Mexico, and the United States by telephone, personal computer, the Internet, or fax - not to mention mail or courier.

"It's truly the first," said Mr. Barbera of Bank of Montreal. "Many organizations like VanCity have announced intentions to do things next year, but that's no fait accompli. The day we announced was the day we were open for business."

Ms. Crompton and Mr. Quart announced Citizens Bank in September but are still waiting for final regulatory approval nearly a year after applying.

"We're dealing with a federal regulator located 2,000 miles from here, so there was an education process and a comfort level that had to be developed," Mr. Quart said. "We had to get them to see our organization, since it was going to be the sole shareholder of this bank. We had to build their confidence in our technology capabilities, our people, our ability to actually pull this off."

Under Canadian law, credit unions may only do business within prescribed geographic areas. To go national, VanCity has taken a charter for a $600 million trust company it bought in 1991, Citizens Trust, and applied to convert it into a banking charter.

Mr. Quart said regulators have given a tacit green light. When final approval comes, most of the trust company's assets will be transferred to the new bank. A staff of 60 customer service representatives will spring into action to handle the calls and electronic transactions.

The bank's business plan calls for it to gain 40,000 to 60,000 customers the first year and to break even the second year.

Mr. Quart said he hopes for $2 billion (Canadian) of assets - VanCity itself has $4.7 billion - within five years, an amount he said would barely evoke a yawn from Canada's banking establishment.

Ms. Crompton said she expects "disenchanted bank customers" to be the first to sign up.

"Banks are seen as quite exploitative here," she said. "I'm not sure that people are looking necessarily for service from a credit union, but they do know of our social mandate and our commitment to service. We don't treat people like an account number."

Another advantage, she said, would be low overhead relative to the banks' extensive national branch networks.

"It's our intention to pass along to our customers the cost savings from not having a branch infrastructure," Ms. Crompton said.

Bankers are undaunted.

"The irony here is that VanCity is actually turning around and applying to become a bank," said Mr. Barbera. "What is the issue here: If you can't beat them, join them?"

Linda Thorstad, provincial director of the Canadian Bankers Association for British Columbia and Alberta, defended the banks, saying they "do a lot in terms of the community and banking service charges are not out of line.

"But particularly in B.C., the (credit union) movement has been very strong, so they have made some inroads into the client space."

She said bankers tend to dismiss VanCity's virtual banking enterprise as "more of a marketing matter."

But Citizens Bank's pitch may resonate among people who remember the days when banks shunned the immigrants and working classes of western Canada. Women still are disproportionately represented among the credit union's membership. And Vancouver's Canby Street still stands as a symbol of how large financial institutions historically turned their backs.

As Mr. Quart explains it, everything west of Canby Street was considered carriage trade; everything east was something less. In 1946, when VanCity was founded, insurance companies were alone in the residential mortgage business.

"Most of those insurance companies were headquartered in eastern Canada," he said. "They would not lend east of Canby Street, so people who wanted to sell their homes needed to finance the transactions themselves."

Mr. Quart said area residents still chafe at the pattern of slights. "We want to be a different kind of bank," he said. "We want people to think of us in that way."

After the new bank opens, it will take a few months to accept Internet transactions. Security kinks still have to be smoothed out.

Meanwhile, a Vancouver rival, IWA Community Credit Union, has beaten VanCity to the Internet punch.

"We are competing against VanCity and the other banks and trust companies in a very competitive market, and we had to have a system and means of delivering products quickly," said Robert Parkinson, chief executive of IWA, which introduced Internet banking Sept. 19.

"Forty percent of Canadian households have a PC; 50% of those have modems; and half of those are on the Internet," Mr. Parkinson said.

His $160 million-asset credit union, with 12,000 members, opened in 1944 for woodworking employees. Today it is open to anyone but maintains a strong labor orientation.

"We are the warm, fuzzy folks," he said. "Even though we're on the Internet, we're still the warm, fuzzy folks."

VanCity executives said their virtual bank would also offer products such as a screen phone with smart card reader. In a smart card pilot with Visa, the credit union lets consumers pay for fast food and other low- dollar items with stored-value cards; reloadable cards are in the works.

"We hope to have trials of home-based smart card reload in the early part of next year," Mr. Wafer said, "so people would be able to load them through a screen phone or a PC."

Not all VanCity's competitors are rushing to top these bold initiatives. Some Vancouver credit union officials don't believe the market is ready.

A spokesman for Surrey Metro Savings Credit Union, the second- largest in Canada, said it plans to offer computer banking within a year or two. But he added, "I don't see us going into virtual banking."

J. Kirk Lawrie, president of Richmond Savings Credit Union, the third-largest, said, "You can't switch off the traditional and say, 'As of Friday night, that's it, on Monday we're virtual.'

"The future growth, I believe, is on the virtual side, but it is future growth, and it's not totally predictable."

Richmond, a suburb of Vancouver, lies below sea level, Mr. Lawrie said. Historically, he said, banks wouldn't make loans there for fear the investment could be washed into the Pacific.

Richmond Savings Credit Union has 73,000 members and $1.7 billion of assets.

"We work on developing customers' total financial picture, as opposed to being cherry-picked and having people treat you as their second or third choice," Mr. Lawrie said. "If you look at the typical credit union, the average account would be $3,000, $5,000. VanCity is nowhere near our $25,000."

Mr. Quart said VanCity is the second-largest credit union in the world, behind only Navy Federal of the United States. Unlike U.S. credit unions, those in Canada pay taxes and, more often than not, compete directly with one another.

"It's a healthy competitive environment in which everyone agrees that it's better for the public to select one of the credit unions than a bank," said Mervin Zabinsky, director of payment and information services for Credit Union Central of British Columbia, a trade association.

Credit Union Central tries to propagate new ideas among credit unions and their members, including remote banking. "Our plan is to spread the PC product that VanCity innovated to all the credit unions in B.C.," Mr. Zabinsky said.

Kevin Finnegan, an analyst at Vancouver-based Pacific International Securities Inc., said the larger credit unions look and behave like banks but lack a certain stigma.

"VanCity and Surrey Metro have jumped out and become urbanized banks, even though they don't like to be called banks," he said. "In effect, they act like the banks but pride themselves on being more user- friendly, more customer friendly, less profit-oriented.

"In Vancouver, they've gotten so big that they're stepping on each other's toes."

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