Thank you for posting this in Microsoft Q&A.
I understand like your customers have accounts in a workforce tenant with Multi-Factor Authentication (MFA) and One-Time Passwords (OTP), and you've set up an application in an external tenant. If my understanding of the issue is incorrect, feel free to post back.The external tenant is where you'll register your apps, create sign-up and sign-in user flows, and manage the users of your apps. The consumers and business customers who sign up for your apps are added to the tenant directory, but with limited default permissions.
Email with one-time passcode is an option in your local account identity provider settings. With this option, the customer signs in with a temporary passcode instead of a stored password each time they sign in. This can be supported without any action required from customers.
For more information: https://learn.microsoft.com/en-us/entra/external-id/customers/concept-authentication-methods-customers#email-with-one-time-passcode-sign-in
Hope this helps. Do let us know if you any further queries.
Thanks,
Navya.
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