What problem it solves
Businesses that collect internationally used to face a choice: open bank accounts in every market (slow, often impossible for non-residents), or share one pooled account and drown in unreconciled references. Virtual IBANs remove the choice: issue as many named account numbers as your flows need, all routing into one place.
Reconciliation becomes structural: a payment to the IBAN issued for client X is, by definition, from client X. Finance teams stop playing detective.
Where the money actually sits
The virtual IBAN is an addressing layer; the funds land in accounts held by the issuing institution (typically an FCA-authorised EMI) where they are safeguarded under e-money rules. The IBAN is “virtual”; the money and its protections are entirely real.
As always, the question worth asking any provider: which institution issues the IBANs, under which licence? You should get a firm name and an FCA reference number, not a shrug.