To me the difference is that the companions you can play as have exactly one background. So if you wish to play as a warlock who is trying to get out of his pact, or a vampire spawn , or mage with a bomb in their chest those options are available. If any of those pre-scripted backgrounds appeal to you can choose those characters but they are exceedingly narrow. You can choose to make the game more reactive by giving up freedom in character creation.
If you look at the folk hero there are 10 different defining events, 8 different Personality Traits, 6 different Ideals, 6 different Bonds, and 6 different Flaws for a staggering 17,280 possible combinations.
That's just too much to script.
If you wanted to make it meaningful then each background could have exactly one detailed option ,however once you do that then how is choosing a pre-scripted background different than playing as one of the companion characters?
As a character without pre-made story hooks you get to create your story by choosing how you react to the world as presented to you without the burden of a developers backstory. Playing my character how I choose, reacting to the world around me and basing my choices on what I think my character would do at that given moment are far more compelling to me than having the game pre-script things based on choices made by the developer.
First off, the reason we’re talking about this is that it’s something Larian had planned to do, and appear to have decided it’s now not worth it. Most people seemed to agree that in DOS2 the origin characters were just the better option, and Larian said they wanted to make custom characters’ stories roughly on par with the origin characters and I think using the backgrounds was one of the ways to do it. I think that’s why some people are a bit disappointed with the news.
If they think their time is better spent elsewhere, that’s actually fine by me. However the reason they gave for cutting it is much as you described. ie all the possible permutations of specific details. But I would argue that they needn’t worry about all those possibilities. They could either make the backstories quite vague and generic, or pick one set backstory for each background (more details in previous post).
I absolutely agree that the decisions you make playing the game are most important, but I don’t really agree that having a backstory should diminish that. It wouldn’t really need to be a very big deal. It could just open up a few different possibilities and change how a couple of select characters react to you. eg. If you get involved in a heist, it would be nice if your criminal background (and maybe contacts) counted for something, compared to being say an aristocrat.
As for the difference with origin characters, I think it would all depend on how far they take it. You’re right that it’s a trade off between defining your own character (largely head canon) and making it meaningful (plus developer time). I doubt there’s an ideal sweet spot that would satisfy everyone, but there maybe room for a good compromise.
I think the best way to do it might be to keep any details of what you did super vague and unspecified, but make the opportunities your vague history opens up more interesting than just the occasional unique line of dialogue.