Adding onto the opportunity cost perspective is the fact that he not only has competition inside of Square-Enix, but also within Nintendo, and even inside the Mario fanbase. Without getting into "meme" picks, a ton of Geno fans think that Geno should get in because he would represent Mario RPGs. But a potential Paper Mario, does the exact same thing while advertising a property that Nintendo still owns and is still an active character. Sure PM is not a huge request, but there are some people who do want to see him in, the major complaint usually thrown out is that he'd be "another Mario" which doesn't really fit because they could make him incredibly unique. On the other side of things you have Waluigi, who's just as requested as Geno, if not more so; again, he's fully first party so he wouldn't have to worry about negotiations with a potential 3rd party AND unlike Geno he's still an active character. Another major character is Toad, who while isn't requested at all, is still a major playable character in most Mario games nowadays.
So really, Geno's problem is that there are a good chunk of MARIO characters that apply to his "niche" but do it better, are easier to negotiate with, benefit Nintendo more, are more active, or a combination of these. That's not to say Geno is impossible or Geno can't get in, but that there are a ton of obstacles in Geno's way, more so than just Square-Enix. People like to bring up Banjo-Kazooie when trying to support Geno, but it's like you said; Banjo has a completely different set of circumstances that helped his inclusion.
