Merchants upgrading their terminals have nothing to do with it; it's a bank scare tactic to shift the blame to merchants.
Every single chip card out there still retains the mag-stripe. Canadian, German, Japanese, British VISA/MC cardholders have no problem using their chipped cards when they visit the US because they all have mag-stripes on the back. Or what, do you think all the tourists we get from Europe, Canada and Japan can't use their VISA and MCs when they pay for goods here? Of course not.
Not a single merchant in the US HAS to upgrade their terminals for the sake of chip card issuance here in the US. If the card retains the mag-stripe, they can still swipe it and upgrade the terminals later (machines have their own end-of-life spans as they get older and break down, they need to be replaced anyway).
It's not like "from December 31, 2012, we're switching off mag-stripe and BAM! At the stroke of midnight January 1, 2013, every merchant needs to go Chip-and-PIN so you better upgrade your terminals by then!"
It's more like "we're beginning to implement Chip-and-PIN starting October 2012 and it'll be up to you whether to change or upgrade your terminals to start accepting it that way. But keep in mind that if you haven't done so by 2015, you're going to be held liable for all fraud charges if you still stick with accepting the less secure mag-stripe. Your choice."
If anything, it's just like the conversion from those old carbon-copy imprinters to the mag-stripe many decades ago. No merchant was forced at gun point to start buying mag-stripe readers and throw away those carbon copy imprinters just because mag-stripes-were-a-comin'. Merchants were free to use the carbon-copy imprinters until they saw a fit to move onto mag-stripe processors themselves.
The same carrot-and-stick approach was done back then as well. "You're all free to continue using the carbon-copy imprinters. But keep in mind, the mag-stripe is faster, safer, and less prone to fraud than the carbon copy clap-clap machine. Your choice."
And it's not like debit or credit cards issued today did away with embossed numbers either. Even cards today still continue to have raised embossed numbers on them as a vestigial remnant of those times, and for various good reasons like some motels still use carbon copy imprinters for incidental purposes (banks requires them to keep a copy of it until a certain period), pizza guy still uses the for pizza delivery, embossed numbers also enables the blind to pull out the correct card, etc.