If the Bitcoin software is flashed and locked in, would that prevent standard card transactions?
You would just not lock it in. The lockdown is actually meant to be done by whoever is managing the terminal - not so much the bank, but the credit card processing company. If a terminal is locked down and they want to run third party apps, it is simple as them signing and distributing the third party binaries. The signature gets provided in a separate .p7s file rather than being embedded into the binary itself, so there is no requirement that the developer sign the binaries themselves.
In practice, few processors actually lock down the whole terminal. Instead, if anything, they simply lock down access to the file system partition containing the app with a password, a feature the terminals support with the intent that they can host multiple simultaneous apps that needed to be protected from one another.