A category-theoretic angle. Accordingly, more questions than ansvers.
Let us ask how to define transfinite iterates of a functor $F$. That is, what properties should uniquely (up to isomorphism) determine $F^\lambda$ as something like "$\underbrace{\cdots\circ F\circ F\circ\cdots}_{\text{$\lambda$ times}}$".
If this is solved, then $\kappa\uparrow\lambda$ could be defined as the cardinality of $F^\lambda(\text{singleton})$, where $F$ is the functor from sets to sets given by $F(S)=X^S$, with $X$ any (fixed) set of cardinality $\kappa$. (It is true that $F$ is actually contravariant, but there still is no problem iterating it.)
When $\lambda$ is an ordinal, one might try direct limit of the $\lambda$-shaped diagram, with $F$ as transition functors.
In this way one gets something peculiar. Already at $\lambda=\omega$ the limiting category might be not equivalent to the category of sets. Whatever it is, $F^\lambda(\text{singleton})$ will be defined, it will be an object of a category defined uniquely up to equivalence.
So it remains to describe this category, at least the class of isomorphism classes of its objects. This will then give a natural candidate for $\kappa\uparrow\lambda$ as one of the members of this class, uniquely determined by the above.
When $\lambda$ is just a cardinal, I am at a loss. I need some ordering to get started with the above.