- Source for mechanical effects
- Roleplaying source for player
- Mine-able material for the GM
The 2nd point is the one I want to focus on. Players will often use their backstory as a foundation that defines or shapes their character's outlook or personality. If the player finds their character in unfamiliar emotional territory, they can go back to the backstory as reference if it includes some sort of roughly analogous event or situation. This help give the player a consistency for how they portray their character.
Sometimes the character has a secret that may or may not be revealed during the course of play. Those usually tie into the 3rd point, where the secret and its reveal can become part of the story, though sometimes no GM intervention is needed.
However, I rarely see it used as a source for exposition where it isn't some secret, but rather just some event from the character's past. Not to say it doesn't happen, but (at least in the games I've played), character background exposition for its own sake is kind of rare.
Now, look at films like Jaws with Quint's story about the USS Indianapolis, or Saving Private Ryan and Ryan's story about his brothers before they shipped out (or Miller's reveal that he is a teacher, though the way that is set up gets a little into secret/surprise territory), or Gangs of New York and The Butcher's story about cutting out his own eye. These all give the audience a flood of details about the character in question. And why is that?
If you conduct a lot of job interviews (and I have), you learn not to ask questions like "How well do you do..." as the answer gives you no useful information other than what the person wants to tell you. A much better question is "Tell me about a time you recently did something that showed..." followed by whatever quality or skill your are interested in hearing more about. Things people have done in their past speak volumes about how they will act in the future. The movie examples do just that, by telling a story of how they acted in the past, you learn what to expect from them in the future.
How does this help RPGs? Especially when introducing a new character to a group, until the opportunity arises for you to show you are a cold-blooded killer or a nervous bookworm or whatever traits your character has, there's not much you can do to effectively convey your character. But if you take a cue from the movies, you can easily tell a story about yourself that tells others what type of character you are.
As a player, I think it's just too good a thing not to do. As a GM, I want to incentivize it. More thoughts on that later.