The new business will be owned by the Co-operative Group with the two brands continuing to trade under their current names.
The companies will harmonise their product range and some branches will close where there is an overlap.
CFS chief executive David Anderson said with the current economic situation and declining trust in mainstream banks there is a appetite among consumers for a large-scale ethical financial brand.
The deal hinges on the passing of a new law in March allowing mergers and a vote by the Britannia’s members in April.
The merger with the Britannia, the UK’s second-biggest building society, will create a new business with £70bn of assets, 9m customers and over 12,000 employees.
Anderson said: "The co-operative and mutual movements have never been more relevant. Owing to the damage done by the credit crunch, people have been crying out for a new way doing business with a financial institution that has their interests at heart.
"This merger will create that organisation and we hope to attract many thousands of customers as a result."