Possibly or they could store N salted hashes, one for one of the N permutations of a mask over the password character positions. This basically splits the end user password into N passwords with smaller entropy but this can be mitigated by requiring high entropy for the original password.
If the "sub" passwords are 2 char long then then they have way too less entropy. For this to that make any sense it must use a sizable subset of the full password (which must be longer than usual to accommodate for that.
And all this to protect for keyloggers. Probably a hardware token second factor is more effective.
