I don't think it's up to me or you to decide whether or not it's "genitalia not the gender". The concern on the right tends to be with having "men in women's restrooms", but the trans community is certainly way less known for their sexual indiscretion than the Republican party, so....
The military service ban is a full ban - which of course is unenforceable, essentially. It'll be just like homosexuals during the Don't Ask, Don't Tell ****, they'll just have to hide it, which is easy enough if they haven't started the transition, although, I'm sure it's not at all fun.
Trump'''s controversial transgender military policy goes into effect
There are certainly concerns about mental health, and due to the way the VA and military healthcare works, it has been possible for reassignment surgery to be covered. While, I would agree that some of the ideas and policies we've had with transgender people may not be perfect, we work under the best understanding we have at the time, not a concern for peoples' traditionalist views. As such, assisting a transgender person to transition and be the person they feel that they are has been the policy.