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
designs:
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
performance:
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.