How Click Fraud Works
A search request is made to Google or another search engine where you place ads and your ads are displayed.
Now a click on your ad happens, which causes costs for you. This at least reduces your budget efficiency.
In extreme cases, your budget is even exhausted, so your ads will no longer be placed. This means that you are invisible to potential customers.
You won't win prospects or customers anymore, so the ads will become unprofitable for you. Your competition is happy.
Sometimes your opponent personally clicks on your ads or encourages his co-workers to do so. The impact can be significant, depending on the size of your budget, but this type of attack is rather selective and scales poorly. In addition, your opponent will not be able to sustain these manual attacks in the long run, even if he is very committed to do so.
Your rival could also have hired a group of clickworkers (clickworkers = inexpensive contractors who generally operate from abroad and take on simple online tasks) to click your ads again and again. This scales already clearly better and provides for substantial problems.
However, it is already possible to transfer this task to huge bot networks with 100,000 bots worldwide for just a few 100 dollars. They search automatically and permanently for your ads and simulate clicks on them or join in with real users and generate clicks on your ads. Technologically the attacks are very advanced and for humans difficult to unmask.
The price is low for your rival, but the damage is great for you.
The perfidious thing about bot networks is that they are not only almost infinitely large and can really consume the entire budget ("burst mode"), but that they can also be controlled in such a way that your budget is not consumed, but a "background noise" of inconspicuous click fraud is generated ("stealth mode"). In the long run, the damage is also considerable for you in this case.
Learn more about the motivation and causes of click fraud.