diff --git a/packages/backend/app/__init__.py b/packages/backend/app/__init__.py
index cdf76b45..f2db3582 100644
--- a/packages/backend/app/__init__.py
+++ b/packages/backend/app/__init__.py
@@ -2,6 +2,7 @@
 from .config import Settings
 from .extensions import db, jwt
 from .routes import register_routes
+from .compression import init_compression
 from .observability import (
     Observability,
     configure_logging,
@@ -52,6 +53,9 @@ def create_app(settings: Settings | None = None) -> Flask:
     # Blueprint routes
     register_routes(app)
 
+    # Response compression (gzip)
+    init_compression(app)
+
     # Backward-compatible schema patch for existing databases.
     with app.app_context():
         _ensure_schema_compatibility(app)
diff --git a/packages/backend/app/compression.py b/packages/backend/app/compression.py
new file mode 100644
index 00000000..c3b8f4c1
--- /dev/null
+++ b/packages/backend/app/compression.py
@@ -0,0 +1,99 @@
+"""
+API response compression & payload optimization (Issue #129).
+
+Provides gzip compression for JSON/text responses via Flask after_request hook.
+Uses Python's built-in gzip — no extra dependencies required.
+
+Features:
+- Gzip when client sends Accept-Encoding: gzip
+- Skips compression for small responses (< MIN_SIZE bytes)
+- Skips already-encoded responses
+- Skips non-compressible content types (images, binary)
+- Tracks compression ratio in X-Compression-Ratio header (dev/debug)
+"""
+
+from __future__ import annotations
+
+import gzip
+import logging
+
+from flask import Flask, Request, Response, current_app
+
+logger = logging.getLogger("finmind.compression")
+
+# Minimum payload size (bytes) before we bother compressing
+MIN_COMPRESS_SIZE = 512
+
+# Content types that benefit from compression
+_COMPRESSIBLE = {
+    "application/json",
+    "text/html",
+    "text/plain",
+    "text/csv",
+    "application/javascript",
+    "text/javascript",
+    "application/xml",
+    "text/xml",
+}
+
+
+def init_compression(app: Flask) -> None:
+    """Register the compression after_request hook with the Flask app."""
+
+    @app.after_request
+    def compress_response(response: Response) -> Response:
+        return _maybe_compress(response)
+
+    logger.info("Response compression enabled (min_size=%d bytes)", MIN_COMPRESS_SIZE)
+
+
+def _maybe_compress(response: Response) -> Response:
+    # Already compressed or explicitly opted out
+    if response.headers.get("Content-Encoding"):
+        return response
+
+    # Skip streaming responses: calling get_data() on a direct_passthrough /
+    # stream_with_context response would buffer the entire stream in memory,
+    # defeating the purpose of streaming and potentially exhausting RAM on large
+    # payloads.  Streaming responses must be compressed at the WSGI/proxy layer
+    # (e.g. nginx gzip_proxied) instead.
+    if response.direct_passthrough:
+        return response
+
+    # Client must accept gzip
+    from flask import request as current_request
+    accept_encoding = current_request.headers.get("Accept-Encoding", "")
+    if "gzip" not in accept_encoding.lower():
+        return response
+
+    # Only compress compressible content types
+    content_type = response.content_type.split(";")[0].strip()
+    if content_type not in _COMPRESSIBLE:
+        return response
+
+    # Get response data (force evaluation of lazy responses)
+    data = response.get_data()
+
+    # Skip tiny payloads — compression overhead isn't worth it
+    if len(data) < MIN_COMPRESS_SIZE:
+        return response
+
+    compressed = gzip.compress(data, compresslevel=6)
+
+    # Only use compressed version if it's actually smaller
+    if len(compressed) >= len(data):
+        return response
+
+    ratio = round(1 - len(compressed) / len(data), 3)
+    response.set_data(compressed)
+    response.headers["Content-Encoding"] = "gzip"
+    response.headers["Content-Length"] = len(compressed)
+    response.headers["Vary"] = "Accept-Encoding"
+
+    # X-Compression-Ratio is a debug-only header: it reveals payload size
+    # information that could aid an attacker (e.g. BREACH-style attacks).
+    # Only emit it when the application is running in debug mode.
+    if current_app.debug:
+        response.headers["X-Compression-Ratio"] = str(ratio)
+
+    return response
diff --git a/packages/backend/tests/test_compression.py b/packages/backend/tests/test_compression.py
new file mode 100644
index 00000000..07834422
--- /dev/null
+++ b/packages/backend/tests/test_compression.py
@@ -0,0 +1,206 @@
+"""
+Tests for API response compression & payload optimization (Issue #129).
+
+Covers:
+- Responses are gzip-compressed when client sends Accept-Encoding: gzip
+- Content-Encoding: gzip header is set
+- Vary: Accept-Encoding header is set
+- Compressed payload is actually smaller
+- No compression when client does not send Accept-Encoding: gzip
+- No compression for small payloads (< MIN_SIZE)
+- No double-compression of already-encoded responses
+- Decompressed content matches original JSON
+- Streaming responses (direct_passthrough=True) are skipped
+- X-Compression-Ratio header is only emitted in debug mode
+"""
+
+from __future__ import annotations
+
+import gzip
+import json
+
+import pytest
+
+
+# ─────────────────────────────────────────────────────────────────────────────
+# Helpers
+# ─────────────────────────────────────────────────────────────────────────────
+
+_GZIP_HEADERS = {"Accept-Encoding": "gzip"}
+
+
+def _register_login(client):
+    client.post("/auth/register", json={"email": "comp@test.com", "password": "pass1234"})
+    r = client.post("/auth/login", json={"email": "comp@test.com", "password": "pass1234"})
+    token = r.get_json()["access_token"]
+    return {"Authorization": f"Bearer {token}", "Accept-Encoding": "gzip"}
+
+
+def _make_large_json_response(app, size_bytes: int = 2048):
+    """Return a Flask Response with a JSON body larger than MIN_COMPRESS_SIZE,
+    without hitting the DB.  Uses a minimal in-request-context approach."""
+    import json as _json
+    from flask import Response
+
+    payload = _json.dumps({"data": "x" * size_bytes})
+    return Response(payload, status=200, content_type="application/json")
+
+
+# ─────────────────────────────────────────────────────────────────────────────
+# Compression behaviour
+# ─────────────────────────────────────────────────────────────────────────────
+
+class TestCompression:
+    def test_no_compression_without_accept_encoding(self, client, app_fixture):
+        """Small /health endpoint — no gzip requested."""
+        r = client.get("/health")
+        assert r.status_code == 200
+        assert r.headers.get("Content-Encoding") != "gzip"
+
+    def test_health_endpoint_too_small_to_compress(self, client, app_fixture):
+        """Tiny JSON like {status: ok} is below MIN_SIZE — should not be compressed."""
+        r = client.get("/health", headers=_GZIP_HEADERS)
+        assert r.status_code == 200
+        enc = r.headers.get("Content-Encoding", "")
+        if enc == "gzip":
+            decompressed = gzip.decompress(r.data)
+            assert json.loads(decompressed)["status"] == "ok"
+
+    def test_large_json_is_compressed(self, client, app_fixture):
+        """A large JSON response should be gzip-compressed when gzip is accepted.
+
+        Uses a mock route registered on the test app instead of seeding DB
+        rows, making the test fast and DB-independent.
+        """
+        import json as _json
+
+        large_body = _json.dumps({"items": ["item_" + str(i) * 20 for i in range(200)]})
+
+        # Register a one-shot route that returns a large JSON body
+        with app_fixture.app_context():
+            @app_fixture.route("/_test_large")
+            def _test_large_route():
+                from flask import Response
+                return Response(large_body, status=200, content_type="application/json")
+
+        r = client.get("/_test_large", headers=_GZIP_HEADERS)
+        assert r.status_code == 200
+        assert r.headers.get("Content-Encoding") == "gzip"
+        assert "Accept-Encoding" in r.headers.get("Vary", "")
+
+        decompressed = gzip.decompress(r.data)
+        data = json.loads(decompressed)
+        assert "items" in data
+        assert len(data["items"]) == 200
+
+    def test_no_compression_without_accept_encoding_on_list(self, client, app_fixture):
+        """Client without Accept-Encoding: gzip must receive uncompressed response."""
+        headers = _register_login(client)
+        plain_headers = {k: v for k, v in headers.items() if k != "Accept-Encoding"}
+
+        r = client.get("/expenses", headers=plain_headers)
+        assert r.status_code == 200
+        assert r.headers.get("Content-Encoding") != "gzip"
+        data = r.get_json()
+        assert isinstance(data, list)
+
+    def test_vary_header_set_on_compressed_response(self, client, app_fixture):
+        """Vary: Accept-Encoding must be present when compression is applied."""
+        import json as _json
+
+        large_body = _json.dumps({"pad": "y" * 2000})
+
+        with app_fixture.app_context():
+            @app_fixture.route("/_test_vary")
+            def _test_vary_route():
+                from flask import Response
+                return Response(large_body, status=200, content_type="application/json")
+
+        r = client.get("/_test_vary", headers=_GZIP_HEADERS)
+        if r.headers.get("Content-Encoding") == "gzip":
+            assert "Accept-Encoding" in r.headers.get("Vary", "")
+
+    def test_already_encoded_response_not_double_compressed(self, client, app_fixture):
+        """A response that already has Content-Encoding must not be re-compressed."""
+        from app.compression import _maybe_compress
+        from unittest.mock import MagicMock
+
+        mock_response = MagicMock()
+        mock_response.headers = {"Content-Encoding": "gzip"}
+        mock_response.content_type = "application/json"
+        mock_response.direct_passthrough = False
+
+        result = _maybe_compress(mock_response)
+        assert result is mock_response
+        mock_response.get_data.assert_not_called()
+
+    # ── Fix 1: streaming responses must be skipped ────────────────────────────
+
+    def test_streaming_response_skipped(self, client, app_fixture):
+        """Responses with direct_passthrough=True must never have get_data() called.
+
+        Calling get_data() on a streaming response buffers the whole stream in
+        memory; the compression middleware must detect and skip such responses.
+        """
+        from app.compression import _maybe_compress
+        from unittest.mock import MagicMock, patch
+
+        mock_response = MagicMock()
+        mock_response.headers = {}          # no Content-Encoding yet
+        mock_response.direct_passthrough = True
+        mock_response.content_type = "application/json"
+
+        with patch("app.compression.current_request") as mock_req:
+            mock_req.headers.get.return_value = "gzip"
+            result = _maybe_compress(mock_response)
+
+        # Must return unchanged and must NOT have called get_data()
+        assert result is mock_response
+        mock_response.get_data.assert_not_called()
+
+    # ── Fix 2: X-Compression-Ratio only in debug mode ─────────────────────────
+
+    def test_x_compression_ratio_absent_in_production(self, client, app_fixture):
+        """X-Compression-Ratio must NOT be sent when app.debug is False."""
+        import json as _json
+
+        large_body = _json.dumps({"pad": "z" * 2000})
+
+        with app_fixture.app_context():
+            @app_fixture.route("/_test_ratio_prod")
+            def _test_ratio_prod():
+                from flask import Response
+                return Response(large_body, status=200, content_type="application/json")
+
+        # Ensure debug is off
+        original_debug = app_fixture.debug
+        app_fixture.debug = False
+        try:
+            r = client.get("/_test_ratio_prod", headers=_GZIP_HEADERS)
+            if r.headers.get("Content-Encoding") == "gzip":
+                assert "X-Compression-Ratio" not in r.headers
+        finally:
+            app_fixture.debug = original_debug
+
+    def test_x_compression_ratio_present_in_debug(self, client, app_fixture):
+        """X-Compression-Ratio MUST be present when app.debug is True."""
+        import json as _json
+
+        large_body = _json.dumps({"pad": "w" * 2000})
+
+        with app_fixture.app_context():
+            @app_fixture.route("/_test_ratio_debug")
+            def _test_ratio_debug():
+                from flask import Response
+                return Response(large_body, status=200, content_type="application/json")
+
+        original_debug = app_fixture.debug
+        app_fixture.debug = True
+        try:
+            r = client.get("/_test_ratio_debug", headers=_GZIP_HEADERS)
+            if r.headers.get("Content-Encoding") == "gzip":
+                ratio = r.headers.get("X-Compression-Ratio")
+                assert ratio is not None
+                assert 0 < float(ratio) < 1
+        finally:
+            app_fixture.debug = original_debug