What is this; Software update is required to connect to your iOS device" on your iPhone

I'm not an expert by any stretch of imagination, but I've always understood this as iOS has undergone a lot more changes and upgrades since Catalina was released, and so when you connect an iOS 14 device, Finder needs to install some extra data files to "talk to" newer iOS 14 devices.

That's my best guess anyway. Someone smarter than me can chime in with more details.

There is no "better" explanation. That is the explanation.