Hawaii's banks operated in a vacuum for years — but no more.

Broad economic forces, and technological advances that could make it easier for mainland banks to serve customers on the once-distant island, are spurring the big three local players — First Hawaiian Bank, Bank of Hawaii (BOH) and American Savings Bank — to revamp their businesses.

But the changes have to be smart ones, such as tinkering with distribution channels and product designs, because the physical limitations of island living — how many more markets can they enter? — remain very real.

"We're aiming to be more innovative than the competition," says Robert Harrison, chief executive of First Hawaiian Bank, the state's biggest bank with $17 billion in assets. "We have limited growth geographically, but not in terms of products."

Hawaii's banking system is highly concentrated. First Hawaiian, Bank of Hawaii and American Savings control nearly 70% of the state's deposits and operate two-thirds of the branches.

Those banks occupy corporate offices within a couple of blocks of each other in downtown Honolulu, so word travels quickly when any management team makes a strategic move.

"People know quickly if someone here is trying to make waves," says Margaret Pettyjohn, executive vice president of retail banking at American Savings Bank.

Their mutual challenges are well known, too. The slowdown in tourism growth after three strong years is the foremost.

However, construction activity is heating up, especially in areas such as public rail and condominiums, and that has fueled expectations of more consumer spending. Much of the investment has been foreign capital, particularly from Asia.

"Construction growth is in its early innings," says Peter Ho, the chairman and chief executive at the $14 billion-asset Bank of Hawaii. "There is breadth and depth there. The core rate of growth is something that I'm rather hopeful about."

Hawaii's banks often work together on participations that allow them to lend to larger commercial developers, bankers say.

The real battleground will likely involve small business and retail banking, where customer trends are slowly changing. Foot traffic at branches and ATMs appears to outpace those at mainland banks.

"We're still a very cash-intensive society," says Pettyjohn, who came to Hawaii four years ago from South Financial Group in Greenville, S.C.

American Savings: Product Push

American Savings has spent the last few years reinventing itself from a service-oriented thrift to an institution that is more focused on cross-selling. The $5.2 billion-asset company has placed a greater emphasis on sales coaching for employees and recently restructured its consumer checking products.

It also started more heavily marketing its home equity product and has lowered the fees it charges small-business clients who do more business with the bank. Plans are in place to introduce an unsecured credit product for consumers.

"We haven't proactively marketed the unsecured side," said Tab Bowers, American Savings' executive vice president of marketing, business and product development. "Our natural spot is to go into average-income bands and to try and do better in consumer credit."

Bank of Hawaii: Card Campaign

Bank of Hawaii has also made changes to better target retail customers. Last year it began issuing its own credit cards, returning to a business it abandoned more than a decade earlier.

Bank of Hawaii is offering a high-end American Express private client card, rewards points for consumers and a mileage program through Hawaiian Airlines.

The company has "reclaimed" 13,000 accounts among current customers. "We're tickled to be back in the cards business," Ho says. "We would like to have frequent revolvers who carry good balances."

Bank of Hawaii has considerable capacity to lend. It holds about a third of Hawaii's core deposits, but nearly half of its assets were securities at Dec. 31. In comparison, securities make up just a tenth of American Savings' assets and 22% of those at First Hawaiian.

The company wants to put those deposits to work. "But you do it slowly over time," Ho says. "We're in no rush. As things begin to open up we would look to convert assets from securities to loans."

A bigger effort at Bank of Hawaii involves its branch network. Management has renovated or relocated a third of the company's nearly 75 branches. The company is looking to have about 15% of its network as in-store locations where traffic has been "up significantly" in recent years, Ho says. "We're not nearly enough ready to declare the branch dead."

Bank of Hawaii is also investing in mobile technology. "Customers need speed, ease and delivery," Ho says.

First Hawaiian: Tech Savvy

First Hawaiian, a unit of BNP Paribas, feels relatively comfortable with the products it already has.

"We made a decision a while back to stay in all of our various markets," Harrison says. "We should already be there for the people when they need financing."

The bank prides itself in technological innovation, touting that it was Hawaii's first bank to offer remote deposit capture. "We're always working on new offerings," Harrison says. The bank is "surveying demand" in areas like prepaid cards and unsecured lending. "We don't want to get left behind in payments."

Outside Threat

Hawaii's banks are confident that one of their own is going to introduce irrational pricing or terms. "We don't see reckless behavior here," Ho says. "We all know that people in this community have long memories."

Rather, the overarching concern is that nonbanks and large mainland banks will eventually try to compete for Hawaiian business.

HomeStreet Bank (HMST) in Seattle, Bank of the Orient in San Francisco, Mutual of Omaha Bank in Nebraska and First American Trust in Santa Ana, Calif., are the out-of-towners with branches there.

Bank of America (BAC) took a shot at one point but sold its Hawaiian operations in 1997. None of the largest U.S. banks have a large presence in Hawaii right now, though Wells Fargo (WFC) has a mortgage operation and Capital One Financial (COF) has a branch in Waikiki that it inherited from ING.

Yet that could change quickly in today's world.

"We are concerned that, in the mid-term, technology can make it easier for mainland banks to come here in targeted ways," Bowers says.