Data Connections provide a pointer to the location of a data source. Flow needs to know where the data source is located. By being a separate module from the Data Definition it allows you to create a single Data Definition and use it against multiple similar data sources in different locations simply by assigning a different Data Connection.
There are three types of Data Connections;
DB Connections provide a pointer to a database.
File Connections provide a pointer to a local file repository (folder). Any files that are processed are done so in this local repository. Transports are used to send or receive files from this local repository.
Web Connections provide a pointer to a Web Service (SOAP).