If $G$ is any group acting on an algebraic variety $X$, we get an action of $G$ on $K[X]$ (ie a map $G\times K[X]\to K[X]$) as you describe. However, this doesn't say anything about whether the action respects the algebraic structure of $G$ (if it has one). To make a geometric analogy, your proposed construction is like having an action of a Lie group on a manifold such that $gm$ is a continuous function of $m$ but maybe not a continuous function of $g$.
A ring homomorphism as in (1) is like a group action that is continuous in both variables. You can recover your maps $\psi_x^*$ if you like. For each closed point $g\in G$ we have a map $e_g:K[G]\to K$ (namely evaluation at $g$), and composing with $\psi^*$ gives a map $$ (e_g\otimes1)\psi^*:K[X]\to K[X]. $$ This is your $\psi_{g^{-1}}^*$ (the inverse is just to keep it a left action).