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Good question. Answer to the question in one sentence, I don't see any major reason on why it should be required to have a separate radio button for "Database" for Connection Type as long as you configure your application server "Validate Signon with Database" = 0, which is default. This is the type of validation used for most of the RDBMS like oracle, Sybase, MS-SQL Server.
When you have your app server configured as 0, then you can notice when you select Database as the connection type option, the Machine Name or IP Address, Port Number and TUEXDO Connect string options gray out. This means, as long as you connect to the database directly bypassing Application server, you need not mention it here in the profile of the configuration file.
As long as you have the ODBC connection details or tnsnames details for oracle then you would be able to connect to the database using your PeopleSoft ID for app server or data mover and bootstrap mode in data mover.
This would be more useful and practiced mostly when you have DB2/MVS RDBMS which gives additional level of authorization. Then the Administrators usually create the configuration files and give the files to the developers/testers when they install People Tools in their workstations.
When you set Database Signon Validation as 1, then the PSAUTH server process additionally attempt to connect to the RDBMS using the PeopleSoft Operator is and password.
If you want to know the effects of this parameter, then try changing the "Database Signon Validation" parameter and check the connection in 2-tier and 3-tier. [Of course, not on the production environment]
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