The control in the Turing Machine
The state of the machine can be used as a finite memory. You can use the state to remember (or, if you prefer, "encode") what the last character you saw was, since there are only finitely many possibilities. If necessary, you can remember the last two characters, or ten or a million, as long as you fix the number at the time when the machine is designed.

What you can't do is remember an unbounded amount of information in the state. So you can't remember, for example, all the characters you've passed over since you last saw an '$a$', or even the number of characters since then.