It’s nearly 3 p.m. on a Sunday, and customers are lined up to make a transaction at a Bank of Hawaii in-store branch in the Kailua Safeway.

Twenty years ago this would have been unheard of, but the face of banking is changing in Hawaii.

Bank of Hawaii, the state’s second-largest bank by assets, is closing three free-standing branches on April 27 — Aikahi and Laie on Oahu and Kohala on Hawaii island — and opening three in-store branches this year — one on Oahu and two on the neighbor islands.

The move to in-store branches, coupled with the popularity of online banking and mobile banking, raises the question:

How long will the traditional bank branch survive?

"There’s been a lot of talk about the traditional branch being dead," said banking analyst Brett Rabatin of Birmingham, Ala.-based Sterne Agee. "The new generation doesn’t need traditional branches, so they’re doing everything online. … And for banks it becomes expensive in an environment where revenue is challenging given the low interest rates."

Transactions at Bank of Hawaii’s traditional branches were down 12 percent from 2006 to 2010, while traffic at its in-store branches was up 23 percent over the same period. Online banking was up 81 percent, while mobile banking — using a smartphone — was up 6,353 percent.

"You’ve got this pretty significant shift in banking preference for the consumer — fewer branches, more in-store, more online and definitely more mobile," said Peter Ho, chairman, president and CEO of Bank of Hawaii. "And then you have a situation where we have the largest network in just about every front here in Hawaii (with 70 branches, 13 of which are in-store, and 454 ATMs).

"What we’ve been doing over the past couple of years is adjusting our branch network to support overall customer preferences," Ho said. "We recognize certain customers may find our changes outside of their particular daily patterns. We believe, however, the overall service experience has been improved by placing more branches in more convenient and better-utilized locations throughout Hawaii."

Ho said the traditional branches that Bankoh is closing are small to medium in size. In addition to the Aikahi, Laie and Kohala branches closing April 27, Bank of Hawaii will close its Pearl Harbor branch the same day, but said it’s in discussion to reopen it in another location.

"The fact of the matter is these types of branches are being used less, and other types of delivery channels are being more frequently used, so our investment dollars are going more toward that type of product," Ho said.

Bankoh has in-store branches in Safeway (nine), Times Supermarket (two) and KTA (two).

Despite the decreased traffic at traditional branches, there will be a role for them for many years.

"The older generation still goes to the branches," Rabatin said.

Traditional branches also tend to be the place where people go to apply for loans. In-store branches tend more to be gatherers of deposits but don’t generate much in loans. Generating loans is key to a bank’s profit.

"What banks have now is very cheap sources of funding, including deposits, but what they need is earning assets besides securities (investments)," Rabatin said. "Loan growth is what everybody is looking for. In-store branches for many banks, unless they’re closing traditional branches and opening up a lot of in-store branches, doesn’t make a lot of sense."

First Hawaiian, the state’s largest bank, has only one in-store branch — at the Kapahulu Safeway — among its 58 Hawaii branches. First Hawaiian plans to open two more traditional branches this year at undisclosed locations.

"The traditional branch network is a very important component of our relationship strategy," said Ray Ono, vice chairman and chief operating officer of First Hawaiian. "We recently did an analysis of our branch locations and validated we’re in the right places. Our customers love our locations, and based on our relationship strategy of our customers having assigned bankers to help them and their families, it seems to work for us in a traditional bank setting."

Ono added, "We believe the traditional branch environment is more conducive to providing the privacy that our customers want in discussing their planning for the future."

Bank of America opened Hawaii’s first in-store branch in October 1993 at the Sack N’ Save in Nanakuli, according to David Hudson, who was running the bank’s retail banking division when the branch opened.

"There’s a lot of things that have to be present to have that make sense," said Hudson, now executive vice president of Central Pacific Bank’s community banking division. "You have to have a grocery store that has enough size to accommodate the branch, and part of the dilemma is that many of our older grocery store locations are just too small.

"You also need a certain critical mass for your traffic counter — a certain number of customer arrivals per week. The beauty of the grocery store is that obviously people need to buy food, and consumers have a primary shopping trip a week plus two others to pick up additional things. They visit a grocery store more than they would visit a hardware store or drugstore."

Central Pacific, the state’s fourth-largest bank, has four in-store branches (two each in Don Quijote stores and Times Supermarkets) among its 34 overall and is looking to add at least one traditional branch.

"We’re evaluating our branch network for where we see an opportunity to fill an area where we don’t have a location," Hudson said.

Still, Hudson isn’t opposed to opening another in-store branch.

"If we could find the right location with the right partner and those elements of square footage and arrivals, and it complemented our distribution system, it would be something we’d be looking at," he said.

"The in-store branches can do virtually anything a traditional branch can do with the exception of heavy coin and currency, which requires vault space, and safe deposit boxes. But having said that, our Royal Kunia location (in Times) does have safe deposit boxes."

Honolulu resident Binh Hoang likes the location of the new Bank of Hawaii in-store branch at the Safeway on Beretania Street.

"It’s convenient because I can go to the bank and the market at the same time," he said.

Hudson said that for the last 10 years, banks in general have been seeing a decline in over-the-counter teller transactions as those transactions migrate to online banking and people increase use of their debit cards to receive cash and make payments.

"That’s also caused ATM transactions to start to decline," Hudson said. "People don’t need cash as much. The debit card gives you a lot of flexibility because when you go to a store and purchase items, you can get cash back."

American Savings Bank, the state’s third-largest bank, has the second-most in-store branches with 12 (three in Walmart, four in Sack N’ Save, five in Foodland) and is planning to launch mobile banking this summer.

Margaret Pettyjohn, director of retail banking for American Savings, said the bank is focused on customer convenience.

"Our branches are open earlier, stay open later and are open more weekends and holidays than other banks," she said. "Our in-store branches are full service, not just transactional counters. This allows us to help customers with loans and investments, in addition to their transactional banking."