Why Wells Fargo Stock Wilted on Wednesday

Key Points

• A top regulator in New York state is unhappy with a payment service offered by the bank.

• It has filed a lawsuit against Zelle.

• 10 stocks we like better than Wells Fargo ›

A popular payment system offered by Wells Fargo (NYSE: WFC) came under some legal fire on Wednesday, and more than a few investors scuttled out of the bank. This left the lender's stock with a 2% loss on the day, during an otherwise generally upbeat session in which the S&P 500 index bumped 0.3% higher.

Headed to court?

That flame was lit by New York Attorney General Letitia James, who has brought a lawsuit against the popular Zelle payment service. The suit accuses Zelle of falling short in efforts to protect its many users from fraud.

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James' office wrote in a press release that an investigation it conducted found that Zelle's operator, a company called Early Warning Systems (EWS), "designed Zelle without critical safety features, allowing scammers to easily target users and steal over $1 billion between 2017 and 2023."

"EWS knew from the beginning that key features of the Zelle network made it uniquely susceptible to fraud, and yet it failed to adopt basic safeguards to address these glaring flaws or enforce any meaningful anti-fraud rules on its partner banks," the Attorney General's team added.

EWS is owned and controlled by a consortium of seven of the top American banks and financial services purveyors. In addition to Wells Fargo, its ownership structure includes JPMorgan Chase, Bank of America, and Capital One Financial.

Accusing the accuser

A Reuters report on the matter quoted Zelle's statement that "This lawsuit is a political stunt to generate press, not progress. The Attorney General should focus on the hard facts, stopping criminal activity and adherence to the law, not overreach and meritless claims."

Still, this doesn't help the reputation of Zelle and, by extension, the banks behind it. I don't think this is a make-or-break for Wells Fargo stock. However, it's a development that's surely worth watching.

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Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Wells Fargo is an advertising partner of Motley Fool Money. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool recommends Capital One Financial. The Motley Fool has a disclosure policy.