In this Letter, we present the first systematic report of shear-induced banding in microconfined biphasic liquid-liquid systems, i.e., formation of alternating regions of high and low volume fraction of dispersed-phase droplets in a parallel plate flow cell. Such a flow-driven, gap-dependent phenomenon is only observed at low values of the viscosity ratio between the dispersed and the continuous phase, and in a given range of the applied shear rate. Based on rheological measurements, band formation is found to be associated with a viscosity decrease as compared to the homogeneous, structureless case, thus showing that system microstructure is somehow evolving towards reduced viscous dissipation under shear flow.