Banks look for alternatives in era of low interest rates. (Special Report-The Changing Face of Banking).

ZERO-percent financing promotions may be great news for consumers and even car dealers seeking to move the metal, but for banks and credit unions they are, well, a zero-sum game.

Those finance institutions have lost an estimated 3 percent share of the auto loan market to the factory financed promotions, according to industry estimates, and the losses couldn't have come at a worse time.

With interest rates overall at a 45-year low, many banks are seeing their interest income reduced, while their payouts on interest-bearing accounts remain relatively stable.

The result is what's known in the industry as margin compression.

"We're trying to operate a business where we're at a 45-year low in rates, and yet we're at an all-time high in costs of operating," said Anthony Kourounis, president and CEO of California Oaks State Bank in Thousand Oaks. 'We're all struggling to find alternative sources of income that are not necessarily tied to interest."

On the lending side, California Oaks is working with dealers that are not connected to factory financing companies. But the bank has also beefed up its efforts in equity lines of credit, hoping to steer some of its customers into alternative methods of financing their car purchases, and it has placed greater emphasis on commercial banking, including accounts receivable services.

"If you're going to rely on rates to go up, your goose is cooked," said Kourounis.

Many other banks and credit unions have put in place strategies to attract used-car financing and new-car financing for those who don't meet the dealer criteria for zero-percent loans.

"We've been very successful in maintaining our loan volume," said Mike Gomez, CEO at Fiscal Credit Union in Glendale. "But we have been very aggressive in doing things like ongoing pre-approval services."

Fiscal runs its database of members through the credit approval process and notifies them that they have been approved for a car loan -- all they need do is pick out the car.

"That really is one of our most successful tactics," Gomez added.

Few quality

Because above-average credit scores are required for these loans, only a small percentage of car buyers qualify for zero-percent financing. In other cases, dealers offer the program only for a limited finance period, so those who need, say, a 60-month financing period end up with a much higher interest rate over the course of the loan. And the loans are rarely offered on used cars.

So many banks and credit unions have focused their efforts on used car buyers.

"Zero percent financing is obviously something you can't compete with," said Richard Cooper, vice president of government and community relations at Telesis Community Credit Union. "But when a customer goes in (to the dealer) looking for zero percent and starts getting into 2.9 percent, 3.9 percent and 4.9 percent, we offer rates in that area."

Telesis and some other credit unions have signed on to participate in a database network used by dealers when they are working with customers to finance a purchase. As a result, Cooper said the organization has made up some of what it lost in new car financing with used car loans.

Antelope Valley Federal Credit Union in Lancaster this year began a new program offering refinancing specials on auto loans. Members who come in to refinance a loan from another lender are eligible for a 2 percentage point reduction in their interest rates.

"It also gave people who bought a new car at a higher rate to go ahead and refinance it," said Linda Walmsley, CEO of Antelope Valley credit union.

Matadors Community Credit Union has stepped up its advertising, sending out the message that many car buyers will not be eligible for zero-percent programs and the credit union's financing may be more advantageous in those cases.

"If you didn't have the zero-percent financing we wouldn't have to spend as much marketing," said Dale Verderano, CEO of Matadors. "We wouldn't have to explain about zero percent, and we would probably get more loan applications as a result."

Loan volume down

Others are promoting the idea to members that they will come out ahead if they opt for the dealer's rebate program, and finance through the credit union.

But even with these programs, bank and credit union officials say their loan volume generally is down across the board.

For one thing, because interest rates have dropped steadily for the past few years, loans now being paid off are being replaced by loans at lower interest rates.

Consumers who once went to credit unions to borrow money for big-ticket items are putting off those purchases because of the uncertain economic climate. Businesses too are reluctant to take on additional debt affecting banks' commercial lending businesses.

And on the real estate side, bank officials say it's nearly impossible to keep up with the constant churn in mortgage refinancing as those rates continue to fall.

"What really hurt us has been the mortgage refinance," said Gomez. "So many people have refinanced four times or five times in the last couple years because of the falling rates. Those are big dollar loans and they're hard loans to replace."