The first proposition of the concept of collecting atmosphere at LEO to utilize it as a propellant dates back from the 1960s; this article presents a detailed review about the development of this technology over the years. More recently, in 2018, this concept gained public attention once more with the successful firing of the first air-breathing electric propulsion system by a team led by ESA, at Italy.
What are the challenges to use the atmosphere as a propellant instead of on board supply ?
The review paper which I mentioned, at the section "5. Avenues for continued research", shows a comprehensive list with some of the major challenges for the development of space air-breathing propulsion:
Air-compatible cathode technology:
Traditional thermionic cathode emission sources cannot operate in the presence of oxygen-containing species because the emission sources are readily oxidized at temperatures necessary for emission.
Techniques to improve propellant utilization on atmospheric species:
The thruster experiments detailed in this review universally encounter reduced propellant utilization efficiency for atmospheric gases when compared to equivalent operation on xenon.
In-space compressor and liquefaction technology:
(...) a compression system for a propellant collecting spacecraft must operate exclusively in a much harsher space environment with restricted access to electrical power.
Improved hypersonic and hyperthermal free molecular flow inlet
The flow into the vehicle is a major contribution to the aerodynamic drag experienced by the vehicle, and determines the mass available for counteracting the drag and for storage.
Improved understanding of how design parameters affect system
A physics-based model of propellant collection as a general concept which is free from the assumptions possible when considering only a subset of propellant collecting concepts is not present in the literature.
You can refere to the article to have a complete explanation about each point. Furthermore, these slides from the University of Tokyo can give you some more information about the concepts and pros and cons of using air-breathing propulsion systems.