MS Dynamics server-to-server authentication

We just added a sandbox to our environment that can connect to a MS Dynamics Online CRM instance and we'd like to utilize the server-to-server authentication. Unfortunately the interface to enter the credentials still requires us to add a username and PW, and my understanding is that this shouldn't be necessary with the new authentication release in January. Does the new authentication need to be enabled on the environment before we can connect? Any suggestions here would be appreciated. 

NOTE: I've looked through the documentation here and it states a PW is required but the screen capture does not require it. It doesn't look accurate. I've also seen this documentation to change the sync method, but that's not available if we don't already have a sync established.