A vision system for a vehicle includes a camera disposed at the vehicle and having a field of view exterior of the vehicle. The camera includes an RGB photosensor array having multiple rows of photosensing elements and multiple columns of photosensing elements. An in-line dithering algorithm is applied to individual lines of photosensing elements of the photosensor array in order to reduce at least one of color data transmission and color data processing. The in-line dithering algorithm includes at least one of an in-row dithering algorithm that is applied to individual rows of photosensing elements of the photosensor array and an in-column dithering algorithm that is applied to individual columns of photosensing elements of the photosensor array. The in-line dithering algorithm may be operable to determine most significant bits and least significant bits of color data of photosensing elements of the photosensor array.