It works by rerouting your web traffic through Google's server, where it's compressed to various degrees.
How Data Saver worksIt also speeds up your web surfing and filters out malware and phishing attacks. The question is whether Google mines your data as it passes through their servers. I imagine they aren't giving us something for nothing. Data Saver can be easily turned off, though.
When you're using Data Saver, Google's servers reduce the amount of data that gets downloaded when you visit a webpage. How much data gets saved depends on the type of content on the page. Secure pages (pages that start with https) and incognito pages load without any data savings.
With Data Saver turned on: