I use cashback sites (in this case topcashback.co.uk) and have received hundred of pounds of cashback. I get a small percentage back for spending large amounts of money on websites that I was thinking of using anyway.
Some points to note. "A friend strapped for cash" - you only get cashback by spending much more money, so its not much help if you are strapped for cash, and is only really useful if you were planning on spending that money.
Cashback is not guaranteed either - so making a purchase based on getting cashback is a bad proposition - the connected company might not pay out.
Cashback is not always the best - generally sites might offer a percentage of cashback - often it is not paid if you use other vouchers for their sites, and these vouchers/codes can be better. For example I was offered say 3% cashback on a link to a site - but on that site I could use a 30% off voucher instead - a much better deal.
Sometimes cashback makes things worse - for some sites (generally I've found some holiday/travel/hotel comparison sites the worst) the prices increase when using cashback links! So you need to check for that. It's been cheaper for me to book a holiday not using cashback as the price increase was more than the cashback (probably as it was taking into account kickbacks to the cashback site). This is not always true, generally it makes no difference on conventional retail but for insurance/holidays you need to be mindful and check directly.
With regards to personal data, I'm not too bothered about them finding out I buy things, I guess it depends on your attitude to data in general and whether you use loyalty cards etc. Personally I do, I can also understand why people choose not to. I presume the cashback sites get some of the kickback from retailers who benefit from free advertising. They also tend to take a small amount of cashback as admin fee once a year (in the site i use case about £5)
The closest I've gotten to a free lunch is depositing £20 on a gambling site, getting £20 cashback for doing this. However (A) it takes over 6 months to get this £20 back through cashback, (B) there is a risk that cashback is not paid and I lose £20 and (C) the gambling site is hoping I deposit more and get addicted to gambling - so I would view it as a business transaction as opposed to a "Free lunch".
Is it too good to be true? - Not really, it's not that good. It can be useful if you were planning on using the site anyway to buy things, you can get cashback as long as it's not more expensive using cashback sites or there weren't better vouchers out there.
Are people getting screwed? - Sometimes prices are worse, sometimes other offers are better, but sometimes I've been paid cashback on things that I was going to buy anyway, it didn't cost me any more and months later I have had cashback paid to me. So as long as I'm wary, no I'm not getting screwed.