An external member is a person who needs to submit applications on behalf of a group of stakeholders.
It's the middle person either working outside or inside your company who is going to be in charge of submitting the information on behalf of the actual recipients.
This means that external members are considered as business-users submitting applications as part of their jobs, therefore, they need a paid seat.
Example of external member
You need to onboard employees of Company A to your services. The Company HR Manager is responsible for submitting the applications on behalf of the employees. The HR Manager would then be an external member.