> So how do they make money?

Generally the logic on "free" financing by the seller is that without it, they may have not made a sale at all. Sure it cuts into their margins, but offering rebates would have had a similar effect.

Klarna probably still charges the vendor a few bucks for handling the thing.

From the people who are not so stable financially. The "free" service is the gateway for many people. Eventually plenty of them will default or use services which do make money for Klarna.

You'd be shocked to see for example how many people pay just the interest on their credit card because the "free" service (when you repay everything monthly and pay nothing extra) encouraged them to use it so much they overburdened themselves. I think Klarna operates along the same lines.

They make money because they know that if you need to use Klarna to finance a €300 purchase you are very likely to default on the loan and pay interest.