Honestly I'd rather have nothing. At least with "nothing" there's still a possibility banjo could show up in a possible 2nd pass. A costume would just burn that bridge from the get go. Banjo has been getting nods and "consolation prizes" for years. At this point, where he has the highest chance at being playable than ever before, another "consolation prize" would be soul crushing for a lot of people. At some point when your once iconic character is being thrown around for easy nostalgia points and nothing else, you get fed up with consolation prizes.
I'm very much aware that the costume or spirit "consolation prizes" would be seen as soul crushing - but then reasons likely are much more muddy than anything fan-related. If I have to hazard a guess, it's due to risk. See Sakurai's questions on Ridley for example - it took him and his teams years to resolve that into a playable character. And it's not due to malice, it's due to the difficulties they had with fitting him into the game. "Too big!" may be a meme, but it has a basis in reality when one of the taunts is Ridley standing up for a moment.
I'm not saying that these risks are entirely logical -
organizational culture's one hell of a drug, just like other forms of groupthink.
That said, Microsoft and Nintendo probably have questions with Banjo. Companies avoid risks like the plague, and that risk is "Financial failure and PR disaster" (Nuts and Bolts) or "Moderately successful, didn't match Kazooie / Tooie, either in sales numbers or critically*" (Yooka-Laylee). If they are indeed going with Banjo in Smash Microsoft probably wants assurance (not likely - guarentee) that they can leverage the Smash appearance into a Threeie. Not just a Threeie - a Threeie that matches or even surpasses Kazooie / Tooie. Now, the question becomes how to revive the duo in a genre that has since seen major changes (not just Mario, but stuff like Assassin's Creed), make sure it plays great and follows Kazooie / Tooie at least somewhat, and you need Threeie to sell like cupcakes. Otherwise Microsoft investors will poke Microsoft and ask "Why didn't you add X instead?"
The reason I'm mentioning investors is that they probably have a lot of influence in this DLC cycle because of Nintendo picking the characters - assuming it's all third party. Investors are one of the big reasons why companies play it safe 9 times out of 10. And not neccessarily out of hatred for fan favorites - investors might view Banjo as "a great choice, buuuuut not a financial guarantee".
Mega Man's and Simon's respective inclusions can serve as counter-examples to my arguments. That said, both of them could be seen as "PR damage control / repair" from Capcom's and Konami's eyes. When Mega Man was announced, Capcom had just suffered from the Inafune debacle, the PR fallout from Bad Boxart Mega Man's SFxT appearance and Mighty Number 9 taking over headlines (before that game crashed). Konami not only came off the heels of the Kojima / Metal Gear Survive disaster at the time, but also Castlevania whilted under uncertainty over where to push the series next. In that sense, Banjo's just been... inactive outside of Rare Replay recently.
So how do you revive Banjo? If I were Microsoft (and Phil's likely already looking for these. There's the chance he may not succeed, but he's probably trying given his comments) I'd go something like this:
1. Get a competent studio to helm the Threeie project. Difficult, but possible. Likewise, you the team to have a solid idea for Threeie. Do you stay the course of Kazooie / Tooie, or do you incorporate Mario / open world like Assassin's Creed elements into Threeie? Also, a Threeie will likely have to have its own unique, engaging stuff to help it stick out.
2. Make sure that the budget's big and attention getting. Not just to get the Banjo fandom's attention, but also the industry at large and the general public. A Threeie will be a big game because it likely follows Kazooie / Tooie - a big budget's neccessary.
3. Position Banjo-Threeie with a big marketing push. After all, it will be seen as "the
BIG return", and not only to reassure investors, but also to project confidence with consumers that Banjo-Threeie will be a great game.
Those reasons are why I've been harping on about it being a tough ask. It's possible, but Phil and Microsoft at large needs to be sure before they go with it. Similar questions are probably also what hampered K. Rool for so long - Nintendo of Japan were AFAIK really surprised to learn about his popularity.
*Kazooie sold 3.5 million, Tooie 1.5 million