Hi Eric,
If uses are to download directly from SAP and upload files to bank (perhaps via terminal or website etc), then after DME is created in F110, you go Environment > Payment Medium > DME administration (or T-code FDTA).
In this case, you do not need to have either of AL11 directory or select "output to file system" in SAPFPAYM.
Also I would select "payment validation" in SAPFPAYM.
Cheers
Taro